An extract from The Corporate Tax Planning Law Review – Edition 3
Venezuela has tried to raise tax revenue mainly though indirect taxes, by increasing the standard VAT rate from 12 per cent to 16 per cent and the financial transactions tax rate from 0.5 per cent to 2 per cent, and creating special contributions.
Tax measures concerning direct taxation have also been taken, such as the creation of a wealth tax in 2020, which taxes the net wealth of large taxpayers at a rate of 0.25 per cent. The new wealth tax taxes assets located worldwide for resident taxpayers and assets located in Venezuela for non-resident taxpayers.
This increase in the tax pressure and the Venezuelan political and economic situation have influenced the tax planning of many multinational companies, which have focused on restructuring or reducing Venezuelan businesses to adapt them to the current local market.
One of the most common strategies has been turning Venezuelan subsidiaries from full risk distributors to commissionaires. The commissionaires’ structure has allowed certain multinational companies to continue operating in Venezuela, reducing risks and taxable income. The tax benefits of the commissionaire structure include potential reductions of income tax, and in certain cases of taxes that are calculated on gross revenue, such as municipal taxes and certain special contributions.
Several multinational companies have also tried to capitalise Venezuelan subsidiaries with financial deficits caused by the accumulation of intercompany debts with their non-Venezuelan shareholders or affiliated companies. To capitalise the Venezuelan subsidiaries, the most common transactions involve debt restructurings and capital contributions, mainly of the same intercompany debts owed by the Venezuelan subsidiaries.
A recent relevant tax issue has been the municipal taxation of services provided by delivery companies, which have exponentially grown during the covid-19 pandemic. Venezuelan municipalities levy taxes on gross income to companies regularly conducting business within their municipal territories, which in the case of certain delivery companies has led to assessments and conflicts regarding the allocation of income across the different municipalities.
Finally, the last developments in Venezuela affecting tax planning are the amendment of the VAT law, which enacted a surcharge tax with a rate ranging from 5 per cent to 25 per cent, applicable on goods and services paid in foreign currencies, or in cryptocurrencies different from the cryptocurrencies backed by the Venezuelan government. In addition, a new tax code was enacted, with amendments mainly focused on increasing penalties and introducing a new penalty adjustment mechanism. In the context of hyperinflation and continuing devaluation of the local currency, the Venezuelan government has enacted these measures to collect national taxes faster and in hard currency, trying to mitigate the rapid decrease in value of tax payments, which are calculated and paid in local currency. Venezuela enacted a few measures to provide tax relief to corporations in the context of the covid-19 pandemic. These measures were limited to income exemptions to individuals and import duties and VAT exemptions to the import of certain essential goods and assets.
i Entity selection and business operations
Venezuela has different taxes levied at the national, state and municipal levels. The main national taxes are income tax, gift tax, VAT, financial transactions tax and certain special contributions. The principal state tax is the stamp tax applicable on certain transactions. Municipalities levy a tax on economic activities performed within their jurisdiction, as well as other taxes such as a tax on ownership of urban real estate property.
The main types of entities for conducting business in Venezuela, such as corporations and partnerships, are generally subject to such taxes in accordance with the applicable tax laws.
There are certain entities that may qualify as tax-exempt for the purposes of several taxes, mainly depending on the entity type and the activities performed. Most of the tax-exempt entities under Venezuelan tax laws are non-profit civil associations, foundations or non-governmental organisations. However, there are some corporate entities that may qualify as tax-exempt if they are exclusively engaged in certain activities such as primary agricultural activities.
The most commonly used entity forms in Venezuela are the following:
- the corporation (SA);
- the limited liability company (SRL);
- the general partnership (SNC);
- the limited partnership (SCS); and
- the stock limited partnership (SCA).
Initially, all types of entities calculate income tax in the same way, deducting expenses from gross income to compute taxable income. However, some entities are taxed at the entity level and others are taxed at the level of the owners.
The SA, the SRL and the SCA are treated as separate legal entities for income tax purposes, paying tax at the entity’s level. Owners of SAs, SRLs and SCAs may be subject to a dividends tax of 34 per cent of the amount of the dividend. The dividends tax only applies if the entity distributes dividends exceeding the taxable income reported at the entity level, pursuant to a calculation method set forth in the Venezuelan Income Tax Law.
The SNC and the SCS are fiscally transparent and any income or losses are passed through to the owners. The SNC and the SCS file an informational return and the owners pay any income tax due in their own tax returns.
There is no possibility of electing the tax treatment of Venezuelan entities and there are no rules about tax grouping or tax consolidation between related entities. Investors choose the entity type for both tax and non-tax reasons.
The preferred form of entity is the SA. However, for certain types of businesses, the use of fiscally transparent entities such as the SCS is common, mainly aiming to consolidate losses and income derived from the different businesses operated by the SCSs in a parent SA.
In addition, many foreign investors use SCAs, which are hybrid entities from the perspective of several jurisdictions. SCAs are taxed as corporations under the Venezuelan Income Tax Law, and are fiscally transparent or eligible entities under the laws of other jurisdictions. SRLs are not commonly used because their maximum stated capital under the Venezuelan Commercial Code is limited to an amount that is currently immaterial.
An SA is owned by shareholders and is a legal entity separate and distinct from its shareholders.3 The liability of the shareholders of a corporation is limited to the payment of the nominal value (and premium, if any) of the shares such shareholder owns. As a general rule, the shareholders of the corporation are not liable for the obligations of the corporation.
Limited liability companies
An SRL is owned by members, who enjoy limited liability like the shareholders of a corporation. The capital of the SRL is represented by quotas. In the event of transfer of a quota owned by a member, the other members have a preferential right to acquire the quota.
An SNC is owned by partners. The partners are jointly and severally liable for any debts, obligations and liabilities of the general partnership (unlimited liability). A general partnership must have at least two partners.
An SCS is owned by at least one general partner and at least one limited partner. The general partners are jointly and severally liable for the debts, obligations and liabilities of the limited partnership, whereas the liability of the limited partners is limited to the amount they agree to contribute to the limited partnership.
Stock limited partnerships
An SCA is similar to an SCS, except that the limited partners’ equity interest is represented by shares, and the regime of the limited partners is similar to that applicable to the shareholders of a corporation. Moreover, the managing partner may be removed by resolution of the shareholders’ meeting, and the partners that do not agree with the removal are entitled to withdraw from the stock limited partnership. In the event of removal without cause, the managing partner must be indemnified; dissenting partners may withdraw from the SCA.
Domestic income taxDetermination of taxable income
Resident entities are subject to income tax at rates of up to 34 per cent, set out in the progressive schedule provided in the Venezuelan Income Tax Law (15 per cent, 22 per cent and 34 per cent).4 Non-residents are subject to income tax at the rate of 34 per cent on their Venezuelan-source income or income attributable to a permanent establishment in Venezuela.
Income tax is levied on net taxable income, which is calculated by subtracting from the annual gross revenue costs and allowable deductions (e.g., salaries, interest, amortisation, depreciation, technical assistance, and any expense that is ‘normal and necessary’ to generate income).
Expenses that are ‘normal and necessary’ to produce income may be deducted.
Taxable income must be reported on an accrual basis, except for income from salaries and fortuitous gains, which are taxed on a cash receipt basis.
Net operative losses may be carried forward for three years, and offset up to 25 per cent of the yearly taxable income of the taxpayer. Net operative losses may survive a change of ownership.
Withholding on outbound payments
Certain types of Venezuelan-source income earned by non-residents are subject to a presumptive income regime, and absent the application of a tax treaty, are subject to withholding tax. For example:
Payments of royalties to a non-domiciled entity are subject to a withholding levied at the progressive corporate rate of up to 34 per cent on 90 per cent of the gross payment.
Payments of technical assistance fees to a non-domiciled entity are subject to a withholding levied at the progressive corporate rate of up to 34 per cent on 30 per cent of the gross payment.
Interest payments made to non-resident entities are subject to a withholding levied at a progressive corporate rate of up to 34 per cent on 95 per cent of the payment.
Interest payments made to qualified financial institutions domiciled outside Venezuela are subject to a withholding tax of 4.95 per cent.
Shareholders, members or partners of Venezuelan SAs, SRLs and SCAs may be subject to a dividend tax of 34 per cent. The dividends tax only applies to the portion of the dividends exceeding the profits taxed at the level of the entity. The determination of whether the dividend tax applies is made following a method set out in the Venezuelan Income Tax Law.
Typically, Venezuelan corporations plan by performing the calculation of the dividend tax provided in the Venezuelan Income Tax Law before deciding the amount of the dividends to distribute, if any.
Branch and permanent establishment
Foreign entities may operate in Venezuela through a permanent establishment. A branch, a fixed place of business, place of effective management and an agent with authority to enter into contracts is considered a permanent establishment. The threshold for a foreign entity to have a permanent establishment in Venezuela is lower under the Venezuelan Income Tax Law in comparison with the tax treaties in effect in Venezuela.
The permanent establishment is taxed on income attributable to the permanent establishment’s activities. Deductions of expenses incurred for the purpose of the permanent establishment are allowed, including executive and general administrative expenses. Interest, technical assistance fees or royalties payments made to the head office and its affiliates are not deductible, but interest, fees and royalties paid to other entities are deductible.
The Venezuelan branches of foreign legal entities are subject to a deemed dividends tax on their earnings. The deemed dividends tax is levied at a flat rate of 34 per cent on the excess amount of the branch’s ‘financial earnings’ over the branch’s ‘net taxable income’. The deemed dividends tax is exempted if the branch reinvests in Venezuela the amount subject to the deemed dividends tax and the investment is maintained in Venezuela for five years.
The calculation of the foreign-source income is made by deducting foreign-source expenses from foreign-source gross income. Foreign-source income is subject to tax at the progressive rates of up to 34 per cent. Foreign-source dividends are subject to a proportional rate of 34 per cent. Foreign-source losses may not offset Venezuelan-source income.
Tax residents may credit income taxes paid abroad against the tax liability resulting from the foreign-source income. In addition, some of the tax treaties signed by Venezuela provide for the exemption method to eliminate double taxation.
As a general rule, foreign entities are deemed separate legal taxpayers under the Venezuelan Income Tax Law. Therefore, tax residents holding an interest in foreign entities are not subject to Venezuelan income tax unless the foreign entity distributes dividends. Exceptionally, foreign entities can be fiscally transparent if the foreign entities either qualify as controlled investments in a low tax jurisdiction in accordance with the Venezuelan CFC rules; or must be treated as fiscally transparent under the rules of a tax treaty signed by Venezuela. This provides opportunities for tax planning. Venezuelan residents may achieve income tax deferral from foreign-source income, even from passive income, to the extent that the non-Venezuelan businesses are not conducted in low tax jurisdictions. The Venezuelan CFC rules generally apply only if the foreign subsidiary is located in a low tax jurisdiction and the Venezuelan resident is deemed to control the foreign subsidiary.
Venezuela has thin capitalisation rules that limit the deduction of interest paid to related parties if a 1:1 debt-to-equity ratio is exceeded. The debt-to-equity ratio and the related-party interest deduction allowed are calculated using the method provided in the Venezuelan Income Tax Law. The Venezuelan thin capitalisation rules also provide that debts between related parties that are not at arm’s-length terms must be deemed equity, and, therefore, interest paid on these debts is not deductible for tax purposes.
ii Common ownership: group structures and intercompany transactionsOwnership structure of related parties
To the extent applicable, describe the tax planning considerations of any topics of particular note arising from your jurisdiction’s rules related to the following:
- tax grouping and loss sharing;
- controlled foreign corporations; and
- tiered partnerships.
Venezuela does not have tax grouping or loss sharing rules. Venezuelan companies generally structure their businesses by incorporating SAs, as it is the preferred entity type. It is possible to have a local structure consisting of a holding SA and underlying operating SAs because there is no double taxation on dividends received from other Venezuelan SAs. However, there are some taxpayers that prefer to use fiscally transparent entities to consolidate income or losses in a parent entity.
Domestic intercompany transactions
There are opportunities for tax planning in domestic intercompany transactions. Related-party payments that may reduce overall net income are allowed if the expenses comply with the general deduction requirements of the Venezuelan Income Tax Law. Moreover, deducting losses generated from related-party transactions is permitted.
A strategy occasionally implemented to utilise losses of related companies is merging companies with losses with companies with taxable income. These restructurings are possible because net operative losses can survive changes of ownership.
The Venezuelan Income Tax Law sets forth certain limitations to domestic intercompany transactions. For example, loans made by Venezuelan entities to shareholders (entities or individuals) are characterised and taxed as dividends if these loans do not meet certain requirements such as bearing interest and not being repaid before the end of the fiscal year.
Another limitation is the general anti-abuse clause (GAAR) of the Venezuelan Tax Code, which allows the tax authorities to disregard transactions, contracts and legal forms if the tax authorities can prove that they lack economic substance and have been entered into with the sole purpose of reducing taxes.
International intercompany transactions
The main Venezuelan income tax rules applicable to international intercompany transactions are the transfer pricing, the thin capitalisation and the CFC rules. These rules limit the ability of Venezuelan taxpayers of shifting income to low-tax jurisdictions or to enter into related-party transactions that are not under arm’s-length terms.
Transfer pricing rules
The Venezuelan Income Tax Law sets forth transfer pricing rules that require Venezuelan taxpayers to report related-party transactions under arm’s-length terms for income tax purposes. The Venezuelan transfer pricing rules are based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TP Guidelines), which are applicable on a supplementary basis provided that they are congruent with the Venezuelan Income Tax Law and international treaties signed by Venezuela. The OECD TP Guidelines are commonly applied in Venezuela and certain tax courts have used them as a source for interpreting the Venezuelan transfer pricing rules.
Venezuelan transfer pricing rules apply to transactions between Venezuelan taxpayers and related parties, and they cover both income and capital transactions. The Venezuelan tax authorities may adjust the profits reported by Venezuelan taxpayers by imputing income or reducing or denying deductions if transactions have been entered into between related parties on non-arm’s length terms. Transfer pricing adjustments only generate income tax consequences and do not have any other legal implications.
The Venezuelan Income Tax Law sets forth an anti-deferral regime called International Tax Transparency Rules, which require Venezuelan residents (individuals or entities) who hold investments located in low-tax jurisdictions to report income earned by the investments (e.g., a foreign subsidiary), even if the investment has not distributed dividends or benefits to the Venezuelan resident.5 The obligation of reporting income derived from investments located in low tax jurisdictions only applies if the Venezuelan resident is deemed to control the investments, because it either manages the investments or controls the timing of the distributions of benefits or dividends of the investment. Certain exceptions apply, for example, the international tax transparency rules do not apply if a foreign subsidiary located in a low-tax jurisdiction earns income from active business activities.
The Venezuelan wealth tax, enacted in 2019, taxes individuals and legal entities that own or possess wealth with a value higher than 36 million tax units (TUs) and 100 million TUs, respectively. Taxpayers will be subject to the annual wealth tax on the portion of their wealth that exceeds these thresholds. Resident individuals and legal entities are subject to the wealth tax on their worldwide wealth. Non-resident individuals and legal entities are subject to the wealth tax only on their wealth located in Venezuela. With respect to non-resident individuals and entities with a permanent establishment in Venezuela, the taxable base of the wealth tax corresponds to the wealth attributable to the permanent establishment.
iii Third-party transactionsSales of shares or assets for cash
Sales of shares of Venezuelan companies are typically preferred to asset deals because generally they only generate income tax consequences, whereas the sale of assets located in Venezuela may trigger income tax, VAT and transfer taxes.
Since the sale of assets or of transfers of ongoing concerns usually has an important VAT effect, a common structure consists of the seller contributing the assets or the ongoing concern into the equity of a newly formed entity, and subsequently selling the shares of the newly formed entity to the purchaser. This structure mitigates the VAT effect of the asset deal, because the contribution of all or most of the assets of a Venezuelan entity into a newly formed entity that continues the same line of business of the entity making the contribution is not subject to VAT under the VAT Law and regulations thereunder. The subsequent sale of the shares is not subject to VAT either.
Sales of shares
Capital gains realised on the sale of shares of Venezuelan companies are subject to income tax with the rate of up to 34 per cent. The gains or losses are determined by the difference between the sale price and the seller’s tax basis in the shares.
The sales of shares of Venezuelan companies are subject to a withholding tax of 3 per cent in the case of resident individuals, 34 per cent in the case of non-resident individuals, and 5 per cent in the case of entities (Venezuelan or foreign entities). The withholding tax does not apply if purchase price is not paid in cash (i.e., the payment is made in kind). The withholding tax does not apply if the capital gains are not subject to Venezuelan income tax under a tax treaty.
Losses realised on the sale of shares of Venezuelan companies are deductible for Venezuelan income tax purposes if certain conditions are met, such as a holding period of two consecutive years.6
Capital gains realised on the sale of shares listed on the local stock exchange are subject to a flat income tax of 1 per cent levied on the purchase price and withheld by the stock exchange.
Sales of assets
Capital gains realised on the sale of assets located in Venezuela are subject to income tax with the rate of up to 34 per cent. The gains or losses are determined by the difference between the sale price and the seller’s tax basis in the assets.
If the sale of assets qualifies as the sale of an ongoing concern, the sale is subject to a withholding tax of 34 per cent in the case of resident individuals, 34 per cent in the case of non-resident individuals, and 5 per cent in the case of entities (Venezuelan or foreign entities). The withholding tax does not apply if purchase price is not paid in cash (i.e., the payment is made in kind). An ongoing concern may be considered a permanent establishment under tax treaties, and withholding taxes, if applicable, are not reduced under tax treaties signed by Venezuela in such cases.
In addition to the income tax effects described above, sales of assets are subject to VAT with the standard rate of 16 per cent, applicable to all tangible movable assets being transferred. VAT does not apply to the sale of intangible assets or real estate property. Moreover, if the sale of assets qualifies as the sale of an ongoing concern, stamp tax of 5 per cent of the sale price applies.
Tax-free or tax-deferred transactions
Some types of transactions may be performed tax-free, although there are no tax-free specific regimes available. For example, mergers do not generate tax implications for the companies merged other than the transfer of the tax attributes and liabilities from one company to the other, and may only generate income tax consequences for the shareholders to the extent that they realise gains as a result of the merger.
Liquidations or winding-up transactions are not tax-free and may trigger tax consequences for the shareholders of the companies being liquidated or wound up. Share-for-share exchanges may also trigger Venezuelan taxes.
iv Indirect taxes
The most relevant Venezuelan indirect taxes are the VAT, the financial transactions tax (FTT) and the municipal tax on economic activities (MTE).
The Venezuelan VAT applies to sales of tangible goods, the provision of services and the import of goods into Venezuela. Taxpayers are charged VAT on all their purchases of tangible goods and services (input credits). In turn, they have to charge and collect VAT in their sales of tangible goods and services (output debits), passing down the VAT to the end consumers. VAT liability (excess of output debits over input credits) is paid monthly, and in certain cases weekly, by taxpayers to the Venezuelan treasury. Currently, the standard VAT rate is 16 per cent. Sales of immovable property, stocks and intangible property are not subject to VAT.
Certain special VAT taxpayers designated by the tax administration must withhold 75 per cent of the VAT charged on all their purchases of tangible movable goods and services and pay the withheld amounts to the Venezuelan treasury. The monthly amount withheld to a taxpayer in excess of the monthly VAT payable by such taxpayer (VAT output debits over VAT input credits) is refundable, but the process to obtain the refund may be lengthy and difficult. Therefore, this withholding regime puts pressure on VAT taxpayers’ cash flow.
Financial transactions tax
The FTT applies to legal persons (not individuals) appointed as special taxpayers who are as follows:
- making payment transactions through Venezuelan banks or financial accounts; and
- paying debts outside the financial system by means of payments, novation, offsetting and forgiveness of debts.
The FTT also applies to legal persons legally related to special taxpayers and to legal persons or individuals making payments on behalf of special taxpayers. The FTT rate is 2 per cent, and its tax base is the amount of the transaction.
Municipal tax on economic activities
Venezuelan municipalities levy the MTE on businesses conducting activities within their municipal jurisdiction. The MTE’s taxable base is the gross income effectively connected with the activities conducted within the municipality, and the tax rates vary in each municipality in accordance with their municipal tax laws and mainly depending on the industry or type of activity in which the taxpayer is engaged.7 The MTE is income tax deductible.
Multinational companies with presence in Venezuela often consider conducting their activities in municipalities that may offer a favourable tax regime or tax incentives. The planning around MTE also takes into account the effects of activities carried out across several municipalities and the avoidance of potential economic double or multiple taxation.