Published on Wednesday 1st April 2020
In your jurisdiction, can the acquisition of a domestic target limit the target’s use of existing tax attributes, such as net operating loss carry forwards or tax credits? Are there strategies or structures to preserve such attributes?
No, under Venezuelan law, the acquisition of a domestic target does not limit the target’s use of existing tax attributes such as net operating loss carry-forwards or tax credits.
When companies that are resident in your jurisdiction are sold to foreign investors, is it more common to sell stock or assets?
Stock deals are the most common form of acquiring a Venezuelan company. Asset deals are also possible but less common given the complexity and costs involved.
In addition, asset deals are subject to income tax and also subject, among others, to (i) the value added tax (VAT) currently levied at a rate of 12 per cent on the purchase price of each moveable tangible asset sold and (ii) the land registry fees levied on real estate property sold. Stock deals are generally only subject to income tax and the tax on local banking transactions if the purchase price is paid in domestic currency through a domestic bank.
Are there particular structures that generate a step-up in the tax basis of assets in a tax-efficient manner?
No tax-efficient step-up of the target company assets is possible in a stock deal. A tax-efficient step-up of certain target company assets may be achieved in asset deals. A step-up in the tax basis of the stock of the target may be achieved through the capitalisation of the target.
Certain movable assets may be contributed at cost to an entity claiming the benefits of a tax treaty and such entity may sell those assets at market value with no income tax implications in Venezuela. Immovable property may be sold in instalments with a step-up in the tax basis of the property and a deferral of the taxable income.
Are there structuring opportunities that would enable a foreign acquirer to provide equity consideration to the shareholders of a domestic target in a tax-deferred manner? Are the rules similar if both the acquirer and the target are domestic?
No. Cash is almost always used in Venezuela as consideration. Stock-for-stock transactions are very rare in Venezuela. There are no rules that provide equity consideration to the shareholders of a Venezuelan target in a tax-deferred manner.
Can management generally roll over its equity in an acquisition in a tax-deferred manner? Are there certain circumstances where a tax-deferred rollover is difficult or impossible?
Management may contribute its equity at cost basis to a holding entity organised in Venezuela or outside Venezuela, and defer the income tax until the shares of the holding company are sold.
Which holding company structures are typically used by foreign investors to acquire domestic targets in your jurisdiction?
Foreign investors typically use holding company structures in countries with both tax treaties and investment protection treaties with Venezuela. The Spanish Entidades de Tenencia de Valores Extranjeros (ETVE) and International Business Companies of Barbados are typically used. Holding structures in Belgium, Denmark, the Netherlands, Sweden and Switzerland are also used.
What types of tax benefits typically arise in connection with transactions in your jurisdiction? Do the parties typically address allocation of such benefits in the transaction documents?
The target company may have important amounts of value added tax (VAT) credits derived from the VAT withholding regime, income tax credits or net operating losses. Foreign and domestic net operating losses may be carried forward for three years and credited up to 25 per cent of the taxpayer’s annual taxable income, but cannot be carried back. Inflation adjustment losses cannot be carried forward or carried back. It is common to allocate such benefits in the transaction documents.
Do real estate transactions (or transactions involving real estate holding companies) create special tax issues in your jurisdiction?
Capital gains realised from the sale or other disposition of real estate will be considered Venezuelan source income. The amount of gain from the sale or other disposition of real estate is represented by the excess of the amount received by the seller over its own tax basis in such real estate sold or otherwise disposed of. The amount received by the seller must be included in its taxable gross income calculation and the tax basis must be included in its deductible cost calculation. The seller must pay income tax of 0.5 per cent of the sale price. The seller may credit the advance income tax paid against its yearly income tax payable and will be able to claim a refund for advance income taxes paid in excess. No withholding is applicable to sale or other disposition of real estate.
Capital gains realised from the sale or other disposition of shares of domestic or foreign real estate holding companies will also be generally considered Venezuelan source of income subject to Venezuelan income tax. Certain tax treaties may allow the sale or disposition of shares of Venezuelan or foreign real estate companies without any domestic tax liability.
Are there other categories of transactions (involving other types of assets or specific types of entities) that raise distinctive tax issues (for example, in the United States, transactions involving real estate investment companies and regulated investment companies)?
Capital gains realised from the sale of shares listed on the local stock exchange are subject to a flat income tax of one per cent levied on the purchase price and withheld by the stock exchange.
Does your jurisdiction impose any distinctive taxes (eg, non-income taxes) that need to be specifically addressed when structuring and documenting cross-border deals?
The special contributions levied at the national level of government are particularly relevant to business. The most relevant contributions are set by the Law on Science and Technology (0.5 per cent to two per cent on gross income), Law on Sports (one per cent on net profits) and the Law on Drugs (one per cent on net income).
The municipal business tax is levied by the local municipalities on gross revenue (ie, no deductions are allowed). The applicable rates vary from municipality to municipality and the industry in which the taxpayer is engaged. The rates generally range from 0.5 per cent and may reach as high as five per cent or more. This tax is levied on the revenue that is attributable to a commercial or industrial business establishment in a municipality or to services rendered within the municipality.
Donations or gifts of assets located in Venezuela are generally subject to the Venezuelan gift tax levied at the rates of up to 55 per cent set forth in the progressive schedule in accordance with the relationship between the beneficiaries of the gift and the donor. Certain corporate transactions may be considered gifts subject to the 55 per cent tax.
Do withholding taxes apply to transactions either from or into your jurisdiction?
Yes, income tax withholdings are applicable to stock for cash transactions and to the sale of assets that qualify as transfer of ongoing concerns. Income tax withholdings are not applicable to stock for stock transactions and to assets sales.
If withholding taxes apply to a transaction, what are the rates? Can they be reduced by treaty or are there structuring techniques or certification processes to avoid or mitigate the tax cost?
The sale or other disposition of shares is subject to an income tax withholding levied at the rate of three per cent in the case of resident individuals, 34 per cent in the case of non-resident individuals, and five per cent in the case of entities (regardless of their domicile condition). Sale or other dispositions of shares are typically exempted from income tax by tax treaties.
The payment for the acquisition of an ongoing concern is subject to a withholding levied at the rate of 34 per cent in the case of resident individuals, 34 per cent in the case of non-resident individuals, and five per cent in the case of entities (regardless of their domicile condition). An ongoing concern may be considered a permanent establishment under tax treaties and withholding taxes are not reduced under tax treaties.
Withholding taxes applicable under Venezuelan laws may be reduced or eliminated if a tax treaty applies.
Are VAT or transfer taxes significant? If so, in which types of transactions?
The Venezuela value added tax (VAT) is a destination-based consumption tax levied at a standard rate of 16 per cent.
VAT applies to sales of all tangible goods and services throughout the chain of distribution. 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), effectively passing down the VAT to the end consumers. VAT liability (excess of output debits over input credits) is paid monthly by taxpayers to the Venezuelan treasury.
Sales of immovable property, stocks and intangible property are not subject to VAT.
Certain special VAT taxpayers designated by the national 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. Likewise, special VAT taxpayers are also subject to said VAT withholding on every sale of goods or services they make (ie, their clients who are special VAT taxpayers withhold 75 per cent of the VAT billed to them). The weekly amount withheld to a taxpayer in excess of the weekly VAT payable by such taxpayer (VAT output debits over VAT input credits) is refundable, but the process to obtain the refund may be extremely lengthy and difficult. Therefore, this withholding regime puts pressure on special VAT taxpayers’ cash flow.
If the transaction is an asset sale, the purchase price allocated to tangible moveable property located in Venezuela will be subject to VAT and if the purchaser is a local special VAT taxpayer, the purchaser must withhold 75 per cent of the VAT charged.
Are there strategies to mitigate VAT or transfer taxes? What party typically bears the costs of VAT and transfer taxes?
The equity contribution of an ongoing concern to incorporate a new entity in Venezuela and the transfer of the shares of the new entity to the purchaser are not subject to VAT.
Purchaser typically bears the costs of VAT and transfer taxes. VAT charged by seller to purchaser will be an input credit that will offset the output debits of the VAT charged and collected by purchaser in the sales of tangible goods and services.
What is the statute of limitations for tax claims in your jurisdiction?
The statute of limitations for tax audits and imposing penalties for income tax and other Venezuelan taxes is six years. The statute of limitations for imposing penalties of imprisonment is 10 years.
The following offences are not subject to the statute of limitations rules: (i) tax fraud, (ii) failure to deposit withheld taxes, and (iii) fraudulent bankruptcy with tax purposes.
In your jurisdiction, can a target be liable for taxes of other members of the consolidated group of which it was a member prior to an acquisition? Is the tax authority likely to assert such a liability against a target?
No, under Venezuelan law there are no tax consolidation rules and a target cannot be liable for taxes of its affiliates. 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.
Is there a typical approach to pre-closing tax indemnification in your jurisdiction?
For asset transactions, the Venezuelan Tax Code provides that during a one-year term following the notice of the transaction to the tax authorities, the purchaser will be jointly liable with the seller for any tax claims of the tax authorities. The joint liability will be limited to the value of the assets acquired and the one-year term.
Are indemnification payments under a purchase agreement taxable to the recipient? Is an indemnity obligation in your jurisdiction typically grossed up for taxes?
Indemnification payments are taxable to the recipient. Indemnity obligations are not typically grossed up for taxes, but gross-up clauses are valid.
Under what circumstances would an investor in a target in your jurisdiction have a tax filing obligation in your jurisdiction solely as a result of its equity interest in the target company?
An investor in a Venezuelan company must obtain a taxpayer identification number as a result of its equity interest in the target company.
In your jurisdiction, are there techniques to efficiently push debt down into subsidiaries in jurisdictions with high tax rates?
Debt push-downs are generally achieved by contracting a loan with a local bank to finance the local operation of the subsidiary. No tax withholding is applicable on the interest payments to Venezuelan banks. The subsidiary will deduct interest payments from its gross taxable income. The subsidiary will thereafter distribute dividends or reduce capital. The loan may also be contracted with an entity in a country with a tax treaty with Venezuela or with a financial institution located outside Venezuela. Interest payments made to financial institutions located outside Venezuela are subject to a flat income tax rate of 4.95 per cent withheld by the borrower. Interest payments made to entities that may claim the benefits of tax treaties with Venezuela are typically subject to income tax withholdings of five per cent or 10 per cent depending on the tax treaty.
Describe any limitations, such as earnings stripping or royalty stripping rules, that limit the ability to effectively shift taxable income when structuring M&A deals.
Under the Venezuelan thin capitalisation rules, interest on related-party debt will be deductible for tax purposes provided the 1:1 debt-to-equity ratio is not exceeded. In calculating whether the amount of debt exceeds the taxpayer’s net equity, the taxpayer’s annual average net equity must be subtracted from the annual average related-party debt. Thin capitalisation rules may also apply even when the total debt does not exceed the taxpayer’s net equity. If the debt derives from a non-arm’s-length transaction with a related party, the debt will be deemed to be net equity for tax purposes.
Is there transfer pricing legislation in your jurisdiction that could apply to transactions among a target and its subsidiaries or affiliates? If so, how restrictive is it?
The Venezuelan income tax law and regulations thereunder contain transfer pricing rules which are based on the arm’s-length principle and modelled after the 1995 OECD Transfer Pricing Guidelines, imposing transfer pricing documentation and filing requirements, and containing specific advance pricing agreements provisions.
Taxpayers are specifically required to base related-party transactions on an arm’s-length basis for tax reporting purposes; notwithstanding the prices actually used. The income tax law establishes that transfer pricing methodologies are only applicable to transactions involving import and export of goods and services. The arm’s-length principle applies to all transactions, including transfers of tangible and intangible property, services and financial arrangements. The Venezuelan tax authority is entitled to make an adjustment if a taxpayer fails to comply with this obligation.
Does your jurisdiction have anti-deferral regimes that apply to operations and income of subsidiaries (for example, a controlled foreign corporation regime, whereby a parent entity would be required to take into income undistributed income earned by a subsidiary)? Do these regimes affect cross-border planning?
The Venezuelan controlled foreign corporation regime generally requires reporting of income and imposes disclosure obligations on Venezuelan residents with direct or indirect controlled interests in foreign entities and other investments organised, located or resident in any of the jurisdictions considered as low tax jurisdictions by the Venezuelan Tax Administration when a resident exercises management or control over such investments. Control over investments is defined as the ability to decide the timing of the distribution of profits, yields or dividends derived from the investment. The control requisite is presumed, but the taxpayer may rebut such presumption.
Under the Venezuelan income tax law, Venezuelan residents who hold an investment in a low tax jurisdiction are generally required to file information returns with their annual income tax return, and make such filings within three months from the end of their fiscal year (normally the calendar year for individuals). In such information returns the taxpayer must disclose all investments made or maintained during the preceding tax year directly or indirectly through controlled structures located in low tax jurisdictions.
An official list of low tax jurisdictions has been made public. Saint Kitts and Nevis were removed from the list on 2003. Also, Qatar and the United Arab Emirates have recently entered into tax treaties with Venezuela, therefore, they will no longer be considered as low tax jurisdictions.
In addition to those jurisdictions included in such list, jurisdictions where there is no income tax at all or an income tax rate of 20 per cent or lower are considered low tax jurisdictions for Venezuelan purposes. Jurisdictions with which Venezuela has entered into tax treaties are generally not considered low tax jurisdictions, but if any of those jurisdictions do not provide information to Venezuela under the exchange of information provision of the applicable tax treaty, such jurisdiction may be considered a low tax jurisdiction.
Are there exit strategies, besides stock or asset sales, that are used in your jurisdiction to achieve tax benefits?
Mergers generally could have no domestic tax consequences. As a result of the stock sale of a shareholder of the target company, the target may merge into its shareholder with no domestic tax consequences.
Discuss your tax treaty network and how that facilitates or impacts tax structuring for cross-border deals. Are any treaties being negotiated or renegotiated? Are any major changes in the structure of your treaties expected?
Venezuela has an extended tax treaty network that facilitates cross-border tax planning. Tax on capital gains, dividends, interest and royalties may be significantly reduced or exempted. The following chart summarises the tax treaties currently in effect in Venezuela.
|Austria||5% if the shareholder is an entity that directly controls at least 15% of the capital of the distributing entity. 15% in all other cases.||
4.95% on interest paid to banks
10% on other interest payments
5% if the shareholder directly controls at least 5% of the capital of the distributing entity. 10% in all other cases.
5% on interest payments to banks
15% other interest payments
5 % copyright and leases
|Belarus||5% if the shareholder directly or indirectly owns at least 25% of the capital of the distributing entity. 15% in all other cases.||
5% if the shareholder directly or indirectly owns at least 25% of the capital of the distributing entity. 15% in all other cases.
|Brazil*||10% if the shareholder is a corporation that directly or indirectly controls at least 20% of the capital of the distributing entity. 15% in all other cases.||15%||15%|
|Canada||10% if the shareholder controls 25% of the capital of the distributing entity. 15% in all other cases.||10%||5% copyright except on videos 10% other royalties|
|China||5% if the shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity. 10% in all other cases.||
5% on interest payments to banks
10% other interest payments
|Cuba||10% if the shareholder is a corporation that directly controls at least 25% of the capital of the distributing entity. 15% in all other cases.||10%||5%|
|Czech Republic||5% if the shareholder is a corporation that directly controls at least 15% of the capital of the distributing entity. 10% in all other cases.||10%||12%|
|Denmark||5% if the shareholder controls 25% of the capital of the distributing entity. 15% in all other cases.||5%||10%|
|France||5% or exempted if the shareholder directly or indirectly owns at least 10% of the capital of the distributing entity||5%||5%|
|Germany||5% if the shareholder owns at least 15% of the capital of the distributing entity. 15% in all other cases.||5%||5%|
|Indonesia||10% if the shareholder directly controls at least 10% of the capital of the distributing entity. 15% in all other cases.||10%||
20% royalty payments
10% technical assistance fees
|Iran||5% if the shareholder is a corporation that directly controls at least 15% of the capital of the distributing entity. 10% in all other cases.||5%||5%|
10% other royalties
|Korea||5% if the shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity. 10% in all other cases.||
5% on interest payments to banks
10% on other interest payments
5% lease payments
10% on other distributions
|Kuwait||5% if the shareholder is a corporation that directly owns at least 10% of the capital of the distributing entity. 10% in all other cases.||5%||20%|
|Malaysia||5% if the shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity. 10% in all other cases.||15%||10%|
|Netherlands||10% or exempted if the shareholder controls at least 25% of the capital of the distributing entity||5%||
5% leases and other royalty payments
|Norway||5% if the shareholder directly controls 10% of the capital of the distributing entity. 10% in all other cases.||
5% interest paid to banks
15% other interest payments
9% technical assistance fees
|Palestine||10% if the shareholder directly controls 10% of the capital of the distributing entity. 15% in all other cases.||5%||10%|
10% technical assistance fees
|Russia||10% if the shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity and invested at least US$100,000 in such entity. 15% in all other cases.||
5% on interest paid to banks
10% on other interest payments
10% technical assistance fees
|Spain||10% or exempted if the shareholder controls 25% of the capital of the distributing entity||4,95% on interest payments to financial institutions or 10% other interest payments||5%|
|Sweden||10% or exempted if the shareholder controls at least 25% of the capital of the distributing entity||10%||
7% other royalties
|Switzerland||10% or exempted if the shareholder controls at least 25% of the capital of the distributing entity||5%||5%|
|Qatar||10% or 5% if the shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity||5%||5%|
Trinidad and Tobago
5% of the gross amount of the dividends if the beneficial owner is a company that holds directly or indirectly at least 25% of the capital of the company paying the dividends. 10% in all other cases.
|United Arab Emirates||5% of the gross amounts of the dividends if the beneficial owner is a company (other than a partnership) that holds directly at least 10% of the capital of the company paying the dividends. 10% in all other cases.||10%||10%|
|United Kingdom||10% or exempted if the shareholder directly or indirectly controls at least 10% of the voting rights of the distributing company||
5% other royalties
5% other royalties
5% if the shareholder owns at least 10% of the voting shares of the distributing company. 15% in all other cases.
4.95% on interest paid to financial or insurance institutions and 10% on other interest payments.
5% lease payments
10% other royalty payments
|Vietnam||5% or 10% if the shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity||10%||10%|
Does your jurisdiction identify certain jurisdictions as tax havens and subject them to adverse tax consequences when they are involved in M&A transactions? Give details.
Venezuela does not identify certain jurisdiction as tax havens. There are no adverse tax consequences when they are involved in M&A transactions. Nevertheless, Venezuela has a list of low tax jurisdictions for purposes of its controlled foreign corporation rules as discussed above.
Describe any material state, provincial or local taxes that may arise in an M&A deal involving a target, a buyer or a seller located in your jurisdiction.
The stated capital of the corporation and any subsequent increase in the stated capital are subject to a registration tax equal to 1 per cent of the stated capital, plus other registration fees and expenses. Commercial registries of the Capital District apply a registration tax equal to 10 per cent of the stated capital, plus other registration fees and expenses.
Are there any proposed laws or regulations that could significantly change how transactions are structured in your jurisdiction?
In December 2015, Venezuela amended its income tax law but no significant changes were made affecting how transactions are structured. Although no official proposals have been made public, it is expected that the government and the national assembly will reform the current tax and exchange control regimes.
What are the corporate tax rates applicable in your jurisdiction on ordinary income and capital gains? Are there any other categories of income subject to preferential rates that are relevant in M&A deals in your jurisdiction?
Venezuelan resident companies are generally subject to income tax on their worldwide income at a progressive tax rate of up to 34 per cent. Capital gains are taxed as ordinary income. A branch of a foreign company and permanent establishments are subject to income tax on its Venezuelan attributable income (regardless of its source) at a progressive tax rate of up to 34 per cent on net income. Non-resident companies are subject to Venezuelan income tax on their Venezuelan source income at the corporate rate of 34 per cent, generally a withholding tax applies on gross income and the rates vary depending on the type of income.
Oil companies are subject to a 50 per cent tax rate on net income and mining companies are subject to a 60 per cent tax rate on net income, except for specific projects considered by the government to be “of national interest” which are taxed at the regular corporate rate.
Domestic banks, insurance and financial companies are subject to a 40 per cent flat rate on net income.
Does your jurisdiction impose any taxes as a result of the indirect transfer of a company organised in your jurisdiction?
No, there is no tax on indirect transfers of local companies, but the transfer of the parent company of a domestic branch may trigger Venezuelan tax consequences.
Are there significant tax issues relating to foreign currency matters in transactions in your jurisdiction involving buyers or sellers resident in other jurisdictions?
There are exchange control restrictions in Venezuela, which, although they were partially lifted in September 2018, still limit the ability of companies to convert local currency into foreign currency.
The exchange controls create a significant distortion in local costs resulting from the differences among the official exchange rates, the illegal black market exchange rate, and local inflation. This may negatively affect foreign companies that need to convert foreign currency into local currency at the official exchange rate.
Discuss and describe any other relevant tax issues in cross-border M&A transactions in your jurisdiction that are not covered in the prior questions.
Purchasers of Venezuelan target companies usually set a holding company in a country that has entered into both a tax treaty and an investment protection treaty with Venezuela. Venezuela is a party to bilateral investment protection treaties with several European, Latin American and Asian countries, which provide for adequate compensation in case of expropriation or nationalisation and access to international arbitration in a neutral forum. These treaties provide protection despite the decision of Venezuela to cease to be a member of the ICSID Convention (effective July 2012), as most of these treaties provide for international arbitration mechanisms additional to the ICSID facilities (for example, UNCITRAL).