22 Jun Income Tax Act
The current Income Tax Act was enacted in 2015 (Official Gazette N° 6.210 Extraordinary of December 30, 2015). However, there have not been major changes since the 2007 amendment, except for changes affecting banks and insurance companies and special taxpayers (large taxpayers identified as such by the Tax Administration).
Following are some preliminary comments regarding the Income Tax Act.
1. Worldwide Taxation.
Venezuela has a system of worldwide taxation. The definition of taxable income was changed in the 1999 Income Tax Act in several ways, including that for resident individuals and domiciled corporations («Local Entities») the taxable income is not limited to the territorial income but also includes income resulting from activities performed or deemed to be performed and assets located or deemed to be located outside of Venezuela. However, the territorial definition of the taxable income continues to be applicable to non-Local Entities, that is, individuals that are not resident of Venezuela and legal entities that are not domiciled in Venezuela. If a non-Local Entity has a permanent establishment in Venezuela, such entity will be subject to income tax on the local and foreign source income corresponding to such permanent establishment.
2. Tax on Net Income.
The income tax is calculated on the net income, that is, gross income minus cost minus deductible expenses. The cost is adjusted by inflation (Article 178). To be deductible, the expenses must be territorial, customary and necessary to generate the income (Article 27).
There are also inflation adjustment rules that provide for the increase or reduction of the taxable amount depending on the increase of the value of the non-monetary assets and liabilities (Article 177) and of the net worth of the Local Entity (Article 183), based on the variation of the consumer price index. Certain types of taxpayers, including banks, insurance companies and those classified as special taxpayers are excluded from the inflation adjustment rules (Article 171).
Income tax is calculated based on a progressive rate. The rate is of 34% for corporations with a net income above 3,000 tax units (a Tax Unit is currently equivalent to Bs. 1,500), except that banks and insurance companies are subject to a 40% rate.
3. Transfer Pricing.
Transactions with related parties could be subject to scrutiny for possible transfer pricing. The arm’s length transaction price will be used as a reference (Article 111). The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the OECD will apply (Article 113).
4. Government Debt Securities.
The income resulting from public debt bonds or any other security issued by the Republic is exempted from income tax (Article 14(12)).
If the foreign public debt is not evidenced by a security or a negotiable instrument (i.e. a bond or a promissory note), the income resulting therefrom does not qualify for the exemption. The exemption only refers to securities and negotiable instruments (título valor) issued by the Republic.
5. Dividend Payments.
Dividend payments are subject to taxes (Article 64).
Dividends are subject to taxes at the rate of 34% (Article 66), to the extent that they arise from profits that have not been taxed at the level of the corporation paying the dividend (Article 64) and an applicable tax treaty does not provide otherwise. This rule basically establishes a minimum tax on net distributions to shareholders. The dividend tax is applied to that portion of the dividend that is paid out of the corporate profits in excess of net taxable income of the corporation that is making the dividend payment.
Payments from a Venezuelan corporation to its shareholders, including under credits, deposits and advances are deemed dividend payments, unless interest thereunder, calculated at a rate that is equivalent to 3% below the average local banking lending rate, is paid to the corporation (Article 70).
The tax on dividends is withheld by the paying corporation when the dividends are paid. If the dividends are stock dividends, the tax on dividends is withheld at the time such stock is sold, from the respective purchase price (Article 71). The stock received as dividend will have no cost for the purposes of calculating the tax applicable to its sale (Article 23, Fourth Paragraph).
6. Tax Treaties.
Venezuela has entered into multiple bilateral treaties for the avoidance of double taxation on income tax, including treaties with Italy, France, the United Kingdom, Germany, the Netherlands, Switzerland and the United States. The tax treaties ordinarily include provisions regarding dividend payments, whereby the power to tax dividends payable to foreign shareholders is limited. If a foreign shareholder is protected by a tax treaty, the tax on the dividends received from Venezuelan corporations will be limited to the lower of (i) the tax applicable under the Income Tax Act and (ii) the tax applicable in accordance with the tax treaty (see newsletter on Tax Treaties).
Violation of the tax laws and regulations may result in civil, administrative and criminal liability. On December 20, 2017, the Constitutional National Assembly (Asamblea Nacional Constituyente, the “ANC”), which existence and validity is questionable, issued an act establishing that the tax administrative liability will be computed based on the value of the Sanctioning Tax Unit, which is a variable amount set annually by the National Executive. On January 29, 2020, the ANC issued a decree enacting a new Organic Tax Code, purported to supersede the one that had been approved in 2014, with further changes regarding penalties, including modifications in the way penalties are calculated.
May 7, 2020