Setting up your Business in Venezuela
Issues to consider
The World Bank publishes every year (since 2003) a report named: Doing Business,
comparing the circumstances of several countries, analyzing almost all national economies
in the world, what has become, in a kind of act of good or bad conduct of business regulation,
with implications that entails, both for investors and countries.
This year (2013), based on the report "Doing Business 2013", our country is number 180 (we
dropped a position, since last year, overall we were in the position 179), of 185 economies
analyzed.
In Latin America, Venezuela occupied Ranked 32 of 32 countries evaluated.
These results reflect a terrible reality; it is very difficult to maintain business operations in
Venezuela.
What type of Business Structure should we use?
Firstly, it is worth mentioning all sorts of companies are represented in a type of legal person
in our legal system. This translates into a wide range of company organizations.
One of the commonly used types of legal person which was encouraged by the government
at the beginning of its administration was the Cooperative (1). The government attempted
then to substitute the capitalist structure of companies for the solidarity principles inherent to
these types of organizations, which are not charity-aimed or commercial. They are mostly
qualified by the Venezuelan legal doctrine as Sui Generis (2). We are unable to specify what
the actual impact has been from Cooperatives in the Venezuelan economy.
The settlement of a legal person with the aim of practicing professional activities or with a
social end is a very common exercise. There are four types of commercial legal persons
stipulated in the Venezuelan legal system: affiliated companies, joint stuck and limited
partnership companies, limited liability companies and private corporations (3). The latter one
is the most common legal figure used for enterprises. There is not a special tax scheme that
encourages foreign investment through one particular sort of legal person.
Setting up your Business in Venezuela
Issues to consider
Seeing that private corporations (more plainly known as simply “companies”) is the most
commonly used type of legal person in Venezuela, it is important to explain the types of
stocks that are used to settle one. The Venezuelan legal system stipulates the principle of
value equity and rights to access to stocks, even if the articles of association (4) establish
otherwise and as long as such stocks are not solely issued by one same party. As a result,
two types of stocks or shares are identified: common shares and preferred shares. The first
one gives the holder all rights without any special benefit or restraint; the latter one allows for
a patrimonial or administrative privilege. It is worth mentioning that the scheme of preferred
shares provides the holders with the tools to achieve the aforementioned privileges, which
may be the right of property in the earning shares, a special right of vote, amongst others.
These can only be limited by the principle of the will of the parties (5). The Venezuelan Code
of Commerce (6) also stipulates registered stocks or shares and bearer shares (7). The
bearer stocks were exceptionally used once after the inclusion of Venezuela to the
Agreement of Cartagena (8) because the article 24 stipulated that only registered shares
were acceptable. Venezuela has recently signed out from the aforementioned agreement,
but it is unclear whether the application of the resolve in our local legal context is still valid.
There is not an explicit rule on this ground locally; hence the application seems in force on
an inertial manner.
Translation notes:
Cooperative (1): a type of legal person commonly used in Venezuela, encouraged (and
occasionally sponsored) by the current government tenure to perform activities that have
been more traditionally performed by companies. Cooperatives are based on a principle of
equal participation with equal distribution of earnings amongst members.
Sui Generis (2): a Latin expression that means unique and it is very commonly used in
Spanish.
Affiliated companies, joint stuck and limited partnership companies, limited liability
companies and private corporations (3): These are the types of legal persons stipulated in
the Venezuelan code of commerce which are settled for business activities. They differ from
each other in terms of liability, share distribution, range of achievement amongst other items.
Similarities with the legal persons stipulated Anglo-Saxon law may be found in their nature,
Setting up your Business in Venezuela
Issues to consider
but the rules of operation differ slightly. For further reference about legal persons in the UK,
see the Companies Act 1989 (CA ´89). For further reference about legal persons in
Venezuela, see the Code of Commerce and the Venezuelan Civil Code.
The articles of association (4): these are normally contained in one same document together
with the Memorandum of Association in Venezuela, which is validated in the Registry Office.
The principle of the will of the parties (5): This is an important legal principle stipulated in the
Venezuelan Law that means both parties act willingly and in good faith.
Code of Commerce (6): it is the rules and procedures for business activity in Venezuela
Bearer shares (7): these are shares that are not allocated to a person and its validity is only
verified by the factual transaction.
Agreement of Cartagena (8): This is the agreement signed in 1969 that set the birth of the
Andean Nations Community.
National Asset Registry Office (9): This office rules the asset management market in the
country.
Establishment (a branch of your overseas business)
Foreign companies may invest in Venezuela also through the establishment of a branch.
According to that stipulated in our Code of Commerce, companies incorporated in a foreign
country which only have branches in Venezuela, keep their nationality but are considered as
tax resident in Venezuela.
The branch must be registered or incorporated in Venezuela.
Branch of foreign corporations are subject to the same tax rules as Venezuelan corporations.
Inter-branch income and deductions must be eliminated.
Limited Liability Partnership:
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Members (partners) have limited liability
Profits are allocated to members who then pay Income Tax on these profits personally
The tax residence of the member, and where the profits in the LLP originated will
determine in what jurisdiction and how these profits are taxed
How much Corporation Tax will the business pay?
Setting up your Business in Venezuela
Issues to consider
It is important to mention that Venezuela used the Tax Unit (TU) as a tax correction factor,
as an element to reduce the negative effects created by inflation on the determination of the
income tax.
Current Corporation Tax rates in Venezuela are:
Taxable income
(Over TU)
0
2.000
3.000
Not over (TU)
Rate %
2.000
3.000
15%
22%
34%
Subtract (TU)
0
140
500
Income for oil exploitation and certain related activities is taxed at flat rate of 50%.
What if we make cross-border transactions between group companies?
Venezuela follows internationally recognised Transfer Pricing (TP) rules where cross-border
trading and financial transactions between affiliated entities have to be conducted on an arm’s
length basis. The price and terms should be the same as if the transactions had been
between completely independent parties.
In 2001, Venezuela introduced transfer pricing rules bases in the OECD Guidelines.
The transfer pricing methods specified in the Venezuelan Income Tax Law are basically the
same to those contained in the OECD Guidelines.
Comparable uncontrolled price (CUP), it is the preferred method rule that requires to be
evaluated by the taxpayer.
The transactions with foreign related parties must be reported to the tax authorities to the
Transfer pricing Informative Return (PT 99 form), which must be filed within the six months
following the end of the fiscal year.
Typical transactions between affiliated entities that are covered by TP regulations are:
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Sale and purchase of goods
Provision of management services
Property rental charges
Transfer of intangible assets e.g. trademarks, patents
Sharing of knowledge, expertise, business contacts etc.
Provision of financial support e.g. inter-group loans and charging a “market” interest
on loans
A business will need to prepare a Transfer Pricing Report proving the arm’s length basis of
transactions. The report will include a functional and risk analysis, analysis of the adopted
Setting up your Business in Venezuela
Issues to consider
pricing model and benchmarking of the arm’s length basis.
Every company with transaction with affiliated entities is entitled to prepare the explanatory
documentation required by the Income Tax Law.
What Employment Taxes and Social Security will need to be paid?
Payroll taxes applicable to resident companies in Venezuela can be summarized as follows:
Contributions
Basis
Contribution
basis
Mandatory
social security
regime
contribution
Employment
benefit regime
contribution
Wages (normal
or regular
wages)
Housing regime
contribution
Total monthly
(on integral
salary)
Concept
established in
the labor law
Total salaries
paid by the
employer for
purposes of the
employer’s
contribution
Total salaries
paid by to
employees
Up to five
minimum
salaries for
workers
Up to five
minimum
salaries for
workers
No was
established
Employee
training
contribution
Workplace
prevention,
conditions, and
environment
contribution
Wages (normal
or regular
wages)
Employer
Contributions
Percentage (%)
9, 10, 11
Employee
Contributions
Percentage (%)
4
2
0,5
2
1
No was
established
2
0,5
No was
established
From 0,75 to 10
N/A
Current Personal Income Tax rates in Venezuela are:
In Venezuela, individual’s tax residents are subject to tax using graduated rates, based in the
Taxable Unit.
The rates are between 6% and 34%. There are 8 brackets.
It is the employers’ legal responsibility to pay over employee’s tax and social security
Setting up your Business in Venezuela
Issues to consider
deductions to the Venezuela tax authorities.
In Venezuela, the employer has the responsibility for deducting and paying contributions.
Venezuela has entered into bilateral Social Security Conventions with the following countries:
Chile, Ecuador, Greece, Italy, Portugal and Spain.
Also, Venezuela signed a Spanish American Multilateral Social Security Convention. The
signing countries are: Argentina, Bolivia, Brazil, Colombia, Costa Rica, Chile, Ecuador, El
Salvador, Paraguay, Peru, Portugal, Spain, Uruguay and Venezuela.
What is Value Added Tax (VAT) and should the business be registered?
VAT is a “goods and services tax” on supplies made, the standard rate of which is 12%.
In Venezuela any individual or company that sales, rental and importation of goods and
rendered of services used or executed in Venezuela.
There are a group of significant exceptions established by law.
There are three types of supply
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Taxable – must charge VAT on supplies, can reclaim input VAT
Exempt – cannot charge VAT nor reclaim input VAT
Outside the scope – not in the [Country] VAT system
The supply of most types of goods and services in Venezuela would be classed as Taxable
supplies. However when these supplies are made to companies which are outside of the
[Country] advice needs to be sought as to what rate of VAT, if any, to use.
Can we provide Share option plans to our staff?
Many companies see Share Option plans as being an important way of attracting, motivating
and retaining key staff.
Venezuela has a number of “approved” share option plans which give tax benefits to
employees and employers alike and it is often possible to adapt an overseas stock option
plan to fit into one of these “approved” plans.
However this is a very technically complex area and careful planning needs to be undertaken
as soon as share option plans are being considered for implementation in Venezuela.
How else can we compensate our employees?
Venezuela has a very comprehensive range of compensation and benefit options available
for companies to offer their employees.
Setting up your Business in Venezuela
Issues to consider
It is not common in Venezuela to the companies compensate their employees paying
pensions.
Private medical insurance, life and disability cover are now commonplace benefits provided
by many Venezuela businesses to their workforce.
To discuss your requirements please contact the International Office on +44 (0) 1245
449266 or email us directly.
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This information is provided for guidance only and is not a substitute for professional advice.
Neither Kreston International Limited nor its member firms accept any liability for any loss
arising as a result of actions taken or not taken based on the information contained in this
document.
The information in this document was prepared as at 30 November 2013.