Manuel Candal and his partners in Candal Taxand summarise the main features of the Venezuelan tax system
Income tax must be calculated and paid each fiscal year. The annual tax return must be filed and paid during the three-month period immediately following the end of the fiscal year. However, the tax authorities may determine another date to file the tax return (special taxpayers have a particular calendar).
Resident corporations are subject to income tax on their worldwide income, whether derived in cash or kind.
The tax base is the annual global net profit, which results from subtracting costs and deductions provided in the Income Tax Law from the taxpayer's gross income. The Venezuelan source net income obtained will be affected by an inflation adjustment calculation.
Non-resident corporations with a PE or fixed base in Venezuela are taxed exclusively on their domestic or foreign income attributable to such PE or fixed base.
It is important to consider that a branch of a foreign corporation is treated in the same way as a Venezuelan corporation for income tax purposes. Both are subject to the same general provisions of the tax law and to the same tax rates.
Some of the tax treaties signed by Venezuela include specific provisions limiting the exposure of the so-called branch tax, which takes place when the branch distributes profits to its home office. Those provisions give a more convenient treatment to the distributions in comparison with the domestic law treatment.
The Venezuelan source income of a non-resident corporation without a permanent establishment in Venezuela may be generally taxed on the gross payment, if the taxpayer cannot demonstrate the incurring of any cost and/or expense directly related with the business activity. There is no tax grouping rules in the Venezuelan Income Tax Law.
In Venezuela, distribution of profits is taxable via withholding. Tax is imposed on dividends with a flat tax rate of 34%, levied on dividends based on the amount not subject to the underlying corporate tax, when the dividend is distributed, paid or credited into an account.
Dividends received by Venezuelan taxpayers from foreign companies are fully subject to a flat tax rate of 34%. Nevertheless, a tax treaty may establish another more convenient treatment.
In the case of stock dividends issued by the paying company to shareholders (individuals or companies), the payment of the dividend tax levied should be made through tax advances equivalent to 1% of the total dividend distributed. This tax advance may be credited by the taxpayer against the dividend tax due, which will result when the shares received as stock dividends are sold.
No cost will be attributed to stock dividends or those arising from the re-valuation of assets.
Capital gains from the sale of shares, movable and immovable property located in Venezuela or abroad, when owned by a Venezuelan tax resident, is taxed as ordinary income. In this case, the tax resident individual or corporation will be entitled to offset as foreign tax credit, under certain limitations, income tax withheld or paid abroad on such income.
If shares or property located in Venezuela belong to a tax non-resident company or individual, they would qualify as domestic source income.
Furthermore, if an income tax treaty were applicable, in general, the transfer or sale of immovable property located in Venezuela would be taxable in Venezuela. Although the transfer of shares may be taxable in the country of residence of the transferor, if the shares to be transferred correspond to a company whose assets principally consist of immovable property situated in Venezuela, any capital gain obtained would be taxable in Venezuela.
The capital gains tax rate is the regular tariff applicable to corporations or individuals. The applicable tax rates, according to the Venezuelan Income Tax Law, are the regular tariffs that vary from 15% to 34% for corporations and from 6% to 34% for individuals. Sales of shares not registered on the Venezuelan Stock Exchange are subject to a 5% withholding tax, which is an advance to be offset against any final tax due on the tax return.
Capital gains would be calculated based on the sale price, minus their tax cost, which will be determined according to specific rules.
The sale of shares registered with the Venezuelan National Securities Commission and made through the Venezuelan Stock Exchange would be taxed with a flat withholding tax rate of 1% based on the sale price. There is no a participation exemption regime or relief for reinvestment.
Transfer pricing rules
Venezuela has transfer pricing rules: it had a significant tax reform in 2001, especially in the area of transfer pricing. The Master Tax Law provides for several transfer pricing principles, including: (i) penalties relating to non-compliance with transfer pricing regulations; (ii) specific rules for transfer pricing audit procedures; and (iii) the introduction of advance pricing agreements (APA).
The transfer pricing rules in Venezuela are based on the arm's-length principle. The domestic legislation: (i) considers applicable the OECD Transfer Pricing Guidelines for interpreting any matter not addressed by the law; (ii) eliminates the safe harbor regime established in 1999; (iii) imposes transfer pricing documentation and filing requirements; and (iv) contains specific APA provisions.
Under the new rules, taxpayers are specifically required to base related-parties transactions on the arm's-length principle for tax reporting purposes, notwithstanding the prices actually used.
Related parties are defined as parties that are directly or indirectly managed, controlled or owned by the same party or group of parties, intermediary agents and any relationship between a Venezuelan taxpayer and entities located in a low tax jurisdiction. In this regard, it is not clear from the definition of related parties if it includes transactions celebrated not only with non-resident companies but also with local entities. However, the Income Tax Law provides that transfer pricing methods are only applicable to the import and export of goods and services transactions.
The arm's-length principle applies to all transactions including transfers of tangible and intangible property, services and financial arrangements.
The transfer pricing methods are basically identical to those included in the OECD Guidelines:
- comparable uncontrolled price method (CUP);
- resale price method (RPM);
- cost-plus method (CPM);
- profit-split method (PSM); and
- transactional net margin method (TNMM).
The choice of method must be properly justified. The first method to be evaluated by the taxpayer should be the CUP.
Venezuela has in effect treaties to avoid double taxation and prevent tax evasion with Austria, Barbados, Belgium, Canada, China, Cuba, Czech Republic, Denmark, France, Germany, Indonesia, Iran, Italy, Kuwait, Malaysia, Norway, Portugal, Qatar, Russia, Spain, South Korea, Sweden, Switzerland, The Netherlands, Trinidad and Tobago, the UK, the US and Vietnam.
Additionally, Venezuela has signed income tax treaties, which will enter into force with the exchange of the corresponding diplomatic notes, with Brazil and Mexico.
In general, double tax treaties signed by Venezuela follow the OECD model. However, in some specific treaties there are aspects that follow the United Nations model, for example the US and Venezuela tax treaty.
Additionally, it is important to notice that in Venezuela the doctrine applicable to the interpretation of tax treaties has not been extensively developed. Therefore, it may be possible to have contrary interpretations of income tax treaties between the tax administration and taxpayers.
Most income tax treaties do not include anti-treaty shopping rules or any provision on limitation of benefits (except for instance the tax treaty signed between the US and Venezuela). However, regarding royalties and interest, the treaties usually provide that they will not apply to the payments between related parties in excess of what would have been agreed in the absence of said relationship.
Domestic law does not override treaties. According to the Venezuelan Master Tax Law, the income tax treaties provisions prevail over domestic legislation.
There is a withholding tax on royalties paid by a local company to a tax non-resident. In Venezuela, the legal definition of royalty includes the assignment of the use of trade marks, logos and brand names subject to patenting. The taxable income is deemed to be 90% of the gross income, which is taxed with a maximum rate of 34% and withheld at source (with an effective withholding tax rate of 30.6%). However, the tax rate may be reduced if the company receiving the royalties is a tax resident of a country with which Venezuela has an income tax treaty: in that case, the withholding tax rate may be between 7% and 15%.
Contracts providing for royalty payments to foreign companies must be registered before the Superintendence of Foreign Investment Office (SIEX) within 60 days of the date of execution of the contract.
There is a withholding tax on interest paid by a local company to a tax non-resident. Interest income received by a tax non-resident corporation other than a bank or a foreign financial institution is subject to withholding tax with a maximum rate of 34%, based on a deemed taxable income of 95% of the gross interest received (with an effective withholding tax rate of 32.3%). The interest income will be included as part of the regular income in the annual tax return. The withholding tax will be considered as a tax credit against the tax due on the annual tax return.
Interest income received by a non-resident bank or financial institution is subject to a withholding tax rate of 4.95%.
However, income tax treaties usually reduce the withholding tax rate for interests; the rate may be between 4.95% and 15%.
There is a withholding tax imposed on dividends paid by a local company to a tax non-resident. The withholding tax is calculated on a flat rate of 34%, based on the profit distributed, via dividend, which was not subject to income tax at the corporate level of the payer. There are some specific rules to be considered for the purpose of the calculation of the dividend subject to tax. However, the treatment may be different if the beneficial owner has its tax residence in a country that has entered into an income tax treaty with Venezuela: in that case, the withholding tax rate may be between 0% and 10%, depending on the participation held by the non-resident parent company in the capital of the Venezuelan company paying the dividends.
Thin capitalisation rules
In February 2007, a new thin cap regime was introduced. According to the regime, interests paid directly or indirectly to related parties, considered as entities that have a direct or indirect participation in the control, direction or capital in other entities, will be deductible only if the total amounts of the related and independent parties does not exceed its net equity (1:1 ratio).
Venezuela has VAT, levied on the transfer of goods, the provision of independent services, commercial property leasing and the import of goods and services. Some specific transactions are levied with a zero tax rate, such as exports of goods and services and the sale of natural hydrocarbons by various corporations to Petroleos de Venezuela, SA. At the moment, VAT is levied on all types of transactions at a rate of 12%. The rate may change every year and is always between 8% and 16.5%. An additional 10% tax rate is applicable to sales or transactions involving specific goods considered of sumptuary consumption, such as rustic automobiles valued at more than $30,000, motorcycles with a cylinder capacity exceeding 500cc, coin or token machines, helicopters, airplanes, fighting bulls, trained horses, caviar and jewelry with precious stones valued at more than $500.
Law provides a number of significant VAT exemptions. Several transfers are excluded or exempted from VAT, such as the transfer of real estate, the sale of intangible movable property, such as shares, trade marks, bonds and commercial effects, movable values, loans in money and bank and insurance transactions, among others. In addition, particular or specific products and services are exempted, products such as food (rice, salt, coffee, tuna, milk, butter, bread, sugar and others), fertilisers, medicines, wheelchairs, books, magazines, newspapers and others and the provision of services of transport, electricity, water and gas for domestic purposes only and educational and accommodation services for students or disabled people, among others.
Individuals or corporations may recover VAT when certain requirements are met, and they must be registered at the Fiscal Information Registry. Taxpayers executing exempt transactions will not be able to deduct the VAT credits generated from the purchase of goods and the provision of services related to those transactions. This VAT must be considered as a cost of executing such sales. Exporters have the right to recover the VAT credits generated from their export activities. Moreover, the National Executive Power may, by means of decree, exonerate some specific transactions because of its nature, and may provide any special VAT recovery procedure.
A VAT withholding tax regime is now in place.
Other national and local taxes
Other national taxes include all taxes related to international commerce and excise taxes on the production and sale of certain goods such as tobacco and alcoholic beverages.
In addition, there is a Gift and Inheritance Tax applicable to the transfer of goods through donations or inheritance, estates and trusts. The tax rates on both inheritance and gifts vary between 1% and 55% of the wealth transferred, depending on the individual relationship with the testator or decedent.
There are local taxes based on the fair market value of immovable property, the use of vehicles, games and gambling, commercial publicity and propaganda, among others.
In addition, corporate and business entities, as well as individuals or partnerships, are subject to the Municipal Business License Tax, which is calculated based on the gross income from any industrial or trading activities carried out in a particular municipality during the fiscal year. The rate may vary from 0.1% to 10%, depending on the activity and the municipality.
There is also a Law that Creates Special Contribution by Extraordinary Prices and Exorbitant Prices of the International Oil Market, where is establishing two (2) special contributions, one for the Extraordinary Prices and another for the Exorbitant Prices, both referring to the international oil market.
In that sense, extraordinary prices means, the monthly average of international prices of the basket of Venezuelan liquid hydrocarbons is more than the price stated in the Annual Budget Law of the respective fiscal year, but less than or equal to $70 per barrel, while exorbitant prices will be those monthly averages when is superior to $70 per barrel.
This special contribution must be paid by exporters of natural or upgraded liquid hydrocarbons and derivatives. The tax applies to joint ventures that: (i) sell liquid hydrocarbons, in its natural state and improved products, only in the case of they have been created according to the Organic Hydrocarbons Law regulations, and (ii) sell such products to PDVSA and any of its subsidiaries.
In the case of the Special Contribution to Extraordinary Prices, apply a rate corresponding to 20%, when the average monthly price is more than the price stated in the National Budget Law of the fiscal year in question, but less than or equal to $70 per barrel. This tax rate is to be applied based on the difference between two prices.
On the other hand, in the case of the Special Contribution for Exorbitant Prices, three assumptions and rates are established:
a) 80% when those prices are more than $70 a barrel, but less than $90 a barrel.
b) 90% when prices are superior than or equal to $90 a barrel, but less than $100 a barrel.
c) 95% when such prices are at least equal to $100 per barrel, in that sense, each percentage of the total amount will be calculated on the difference between two prices.
These special contributions could be the object of partial or total exoneration by the National Executive to benefit certain exports within the framework of the economic policies and international cooperation.
Finally, it is important to mention that during the rest of the year an integral tax reform is not expected.
Manuel Candal (firstname.lastname@example.org), managing partner, Candal Taxand