22 Jun Venezuelan Tax Treaties
- General Comments.
Venezuela has entered into more than 41 bilateral agreements aimed to avoid double taxation. The tax treaties are of two types: (a) tax treaties to avoid double taxation on income tax (referred to as the “Income Tax Treaties”) and (b) tax treaties to avoid double taxation on income from international transport (“International Transport Treaties”). Venezuela has Income Tax Treaties, ratified by Congress, with: Italy, France, the United Kingdom, Germany, Portugal, the Czech Republic, Trinidad and Tobago, The Netherlands, Switzerland, Norway, Mexico, Sweden, Belgium, the United States of America, Indonesia, Denmark, Barbados, Canada, China, Spain, Qatar, Cuba, Iran, Brazil, Kuwait, Russia, Austria, Korea, Malaysia, Belarus, Saudi Arabia, Vietnam and the United Arab Emirates (see http://declaraciones.seniat.gob.ve/portal/page/portal/MANEJADOR_CONTENIDO_SENIAT/02NORMATIVA_LEGAL/2.3CONVENIOS/2.3.html). Venezuela has International Transport Treaties, ratified by Congress, with: the United States of America, The Netherlands, Brazil, the United Kingdom, Germany, France, Italy, Portugal, Switzerland, Trinidad and Tobago, Spain, Argentina, Chile, Canada and Belgium (see http://declaraciones.seniat.gob.ve/portal/page/portal/MANEJADOR_CONTENIDO_SENIAT/02NORMATIVA_LEGAL/2.3CONVENIOS/2.3-3.html). On December 3, 2018, Venezuela signed similar treaties with Turkey, but they have not been ratified, as required by the Constitution. In addition, Venezuela had a global double-taxation agreement with the Andean Community countries (Colombia, Ecuador, Peru and Bolivia), but it denounced the agreement in 2006.
- International Transport.
The International Transport Treaties ordinarily exempt from taxes income resulting from international transport activities performed by an entity of the country with which Venezuela has entered into the treaty. The scope of the International Transport Treaties varies from one treaty to another, according to the way in which the relevant income subject to the treaty is defined. In addition to the International Transport Treaties, the Income Tax Treaties also include provisions regulating the tax treatment of profits from shipping, inland waterways transport and air transport (usually covered in Article 8 of the Income Tax Treaties). Where both types of treaty cover the same income, normally the Income Tax Treaty, rather than the International Transport Treaty, will indicate which rule applies.
Absent an International Transport Treaty, or an Income Tax Treaty covering international transport income, foreign entities operating ships or aircraft in international commerce with Venezuela are subject to Venezuelan income tax at the ordinary corporate tax rate (up to 34%). These entities are deemed to have a net income equivalent to 10% of half of the amounts of freight and tickets to or from Venezuela (Article 40 of the Income Tax Act).
- Income Tax Treaties.
Most of the Income Tax Treaties have the same rules, except that each individual treaty has different tax rates for specific types of income. They are based on the OECD double taxation model convention (1977 version, updated in 1992). Variations result from changes in the text and from the protocols that are executed with respect thereto.
The purpose of the Income Tax Treaties is to avoid double taxation. They also, from a Venezuelan point of view, try to encourage foreign investments in Venezuela. The tax treaties (i) allocate the taxing authority to one of the countries, where both display 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 are aimed at reducing tax evasion. As a supplement to the commitments undertaken by the countries under such 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 establishing maximum tax rates. The tax treaties enjoy a preference of application above any other Venezuelan law (Article 12 of the Civil Procedure Code; Article 2 of the Organic Tax Code). In some instances, the current Income Tax Act establishes lower tax liabilities than those stipulated by the tax treaties. In such cases, the Income Tax Act will prevail.
- Specific comments on the Income Tax Treaties.
The most significant changes with regard to Venezuelan income tax that arise from the Income Tax Treaties include the following:
(a) Dividends.
The Income Tax Treaties ordinarily establish a maximum tax rate on dividends. This may vary, depending on the percentage of the shares in the dividend payer that is held by the foreign shareholder. The larger the holdings, the lower the rates, to the point that, in some cases, a full tax exemption may apply for holdings above certain levels.
(b) Interest.
The Income Tax Treaties establish maximum tax rates for interest payments. 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 Act (Second Paragraph of Article 52).
Most of the Income 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 the export promotion agencies of the country with which Venezuela has signed the treaty.
(c) Capital Gains.
The Income Tax Treaties allocate the taxing power on capital gains based on the type of asset in question. The treaties ordinarily relate 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 particular treaty). Most of the Income Tax Treaties 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 at the ordinary corporate tax rate, except that, if Venezuelan shares are sold through a local Stock Exchange, the tax will be 1% of the sale price (Article 74 of the Income Tax Act), the tax being 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 outside of the Stock Exchange, the buyer withholds 5% of the price paid to the foreign seller (Article 9(21) of Decree 1808).
(d) Royalties.
The Income Tax Treaties usually incorporate a maximum rate for taxes on technology payments (normally Article 12 of the treaty). Under current Venezuelan Income Tax Act, 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 they are royalties (Articles 41 and 48 of the Income Tax Act). The Income Tax Treaties commonly establish lower tax rates.
- Effectiveness of Treaties.
For treaties to become effective, they must be ratified by each country, and the ratification instruments must be exchanged. Ratification is obtained in Venezuela pursuant to a law passed by Congress. The Income 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 that are calculated by periods, as is the case with Venezuelan income tax, will only be affected by the treaty as of the fiscal year beginning on or after the 1st of January following the date of the exchange of the ratification instruments. This is consistent with the Venezuelan rule for the coming into effect of changes in tax legislation (Article 8 of the Organic Tax Code).
- Interpretation of Treaties.
Some provisions of the tax treaty may appear confusing and require interpretation. When construing the treaty, the following guidelines can be followed:
(a) When more than one interpretation is possible, the parties may establish a mutual understanding (usually Article 26 of the treaty).
(b) Most of the Income Tax Treaties are modeled on the OECD Model Tax Convention on Income and Capital (1977, as amended in 1992). The official commentaries to the articles of the OECD (Report of the Committee on Fiscal Affairs) may therefore legitimately be resorted to for help when interpreting the Income Tax Treaties.
(c) If a term used in the treaty is not defined therein but it is defined in the domestic law of one of the countries, the meaning provided by such domestic law will be used when it refers to taxes from that country.
(d) The rules of the Vienna Convention on the Law of Treaties of May 23, 1969 (not signed but followed by Venezuela in its practice) may be adhered to, which implies that (i) the treaty should be interpreted in good faith, in accordance with the ordinary meaning given to the terms of the treaty in their context and in the light of its object and purpose (Article 31), a principle which, in itself, coincides with the principles of interpretation for Venezuelan law (Article 5 of the Organic Tax Code and Article 4 of the Civil Code); (ii) a party to any treaty 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, ranks above ordinary laws, Article 8 of the Civil Procedure Code); and, (iii) when a treaty is authenticated in two or more languages, which is usually the case, the text is equally authoritative in each language (Article 33).
- The Tax Treaty with the United States.
The tax treaty with the United States came into effect on January 1, 2000, and, as is the case with Income Tax Treaties with European countries, it follows the OECD Model Convention. However, this treaty has 19 special rules that change or clarify the basic treaty, and which should be checked carefully since in some cases they modify the meaning of the treaty. The special U.S./Venezuela rules include, for example:
(a) Special rules regarding the definition of a permanent establishment for the purpose of determining the right to tax the profits of an enterprise.
(b) Limitations on the deductibility of expenses for the purpose of determining the taxable income of a permanent establishment (U.S./Venezuela Treaty Protocol, Section 6).
(c) The rules of the treaty for shipping and air transport of 1987 between the U.S. and Venezuela are still in effect (Protocol, Section 7).
(d) Investment loans granted or guaranteed by the Export-Import Bank and the Overseas Private Investment Corporation are expressly exempt from Venezuelan tax (Protocol, Section 9).
(e) Fees and income arising out of technical assistance, studies, surveys, engineering, drawing plans and such are not considered to be royalties, but rather either business profits or personal services (Protocol, Section 11).
May 7, 2020