22 Jun Lending into Venezuela
This Newsletter provides general information on the granting of a loan by a foreign financial institution (the “Foreign Loan”) to a Venezuelan borrower (the “Borrower”). Some of the comments below may not be applicable to specific transactions.
- Governmental Authorizations and Registration.
Some public sector Borrowers, including some government owned corporations, must obtain authorization from Congress (the National Assembly) before contracting a loan (see section 2). The loan agreement could be considered null and void if this prior authorization has not been obtained. Public sector Borrowers include the central government (the Republic of Venezuela) and corporations where the government, directly or indirectly, holds more than 50% of the stock. The Republic of Venezuela contracts most loans directly through the Ministry of Finance. Private sector Borrowers comprise all other Borrowers including multinational corporations.
- The Public Sector Financial Administration Act; Borrowing by Public Entities.
The Republic of Venezuela, the States and Municipalities and the entities in which these, directly or indirectly, hold 50% or more of the equity (the “Government-Owned Entities”) are subject to the Public Sector Financial Administration Organic Act (the “PSFAA”). Pursuant to the PSFAA, the contracting of a Foreign Loan is subject to certain restrictions, including prior authorizations.
Restrictions under the PSFAA include the following: (i) no security interest may be created on assets of the Republic, the States or Municipalities (Article 105), (ii) the States and Municipalities may not enter into foreign loans or other credit transactions (Article 107), (iii) autonomous institutes may not enter into credit transactions (Article 103), and (iv) the Republic and the government-owned corporations may not guarantee third-party obligations (Article 104).
The authorizations that must be obtained by the Government-Owned Entities vary, depending on the type of entity. Ordinarily the National Executive will approve the contracting of the Foreign Loan after it has obtained an authorization from the National Assembly and after requesting the opinions from the Finance Commission of the National Assembly and the Central Bank of Venezuela (Articles 98, 82 and 97). These authorizations are sought by the Public Credit Office of the Ministry of Economy and Finance.
Since the beginning of 2016, the National Executive has been in conflict with the National Assembly, which is controlled by the Opposition after the December 6, 2015 parliamentary election. Thereafter, the National Executive have issued several decrees of emergency, abrogating exceptional powers. Such decrees have been confirmed by the Supreme Court, which has sided with the National Executive. Furthermore, in that scenario, the National Executive has approved the National Budget and the Annual Public Debt Contracting by itself, instead of seeking the approval by the National Assembly. Such actions have also been ratified by the Supreme Court. The validity of such actions, and thus of the resulting contracting, is questionable.
Since January 10, 2019, the legitimacy of Mr. Nicolas Maduro as the President of Venezuela has been challenged, as anticipated by the National Assembly and foreign countries, including the Lima Group and the European Union. Thereafter, his approvals for public credit transactions and the actions of his Minister of Finance and other appointees have been considered as null and void by the Opposition and the countries that recognize Mr. Juan Guaido as the Interim President.
Some Government-Owned Entities are not subject to the requirements of the PSFAA (Article 101), including government-owned corporations (where 50% or more of the equity is held directly or indirectly by the Republic) which are (i) subject to the General Banking and Other Financial Institutions Act (currently the Banking Sector Institutions Act; e.g. Banco de Venezuela S.A.), (ii) created pursuant to the Act that Reserves the Hydrocarbons Industry and Commerce to the State (currently the Hydrocarbons Organic Act; these being the national oil company, PDVSA, and some of its subsidiaries), and (iii) created pursuant to Decree 580 of 1974, related to the iron mining industry (e.g. CVG Ferrominera Orinoco C.A.). Nonetheless, such entities must certify their payment capacity to enter into the credit transaction and must complete certain publications and notices.
- Governing Law and Submission to Jurisdiction.
In principle, the Foreign Loan agreement may be governed by a foreign law (Article 29 of the International Private Law Act) and the Borrower, including the Government-Owned Entities, may submit to a foreign jurisdiction for the settlement of disputes. The enforcement of a foreign judgment in Venezuela will, however, be subject to the satisfaction of certain conditions (the exequatur procedure, Article 53 of the Private International Law Act).
- Free Convertibility.
The conversion of Bolivars (local currency) into foreign currency is restricted since February of 2003. The exchange control was formally eliminated in September of 2018, but access to foreign currency continues to be limited and managed by the government (see Newsletter on Venezuelan Exchange Control). The purchase of foreign currency with local legal tender has been subject to some form of restriction or registration on and off since 1983.
- Venezuelan Taxes.
The net income resulting from the Foreign Loan to private sector Borrowers is subject to Venezuelan income tax at the rate of 4.95% (Article 52 of the Income Tax Act). The tax is withheld at source. The 4.95% tax on interest must be withheld by the Borrower when making the interest payment (Article 9(3)(b) of Decree N° 1808 of April 23, 1997). The applicable tax rate could be lower if the lender’s country has a tax treaty with Venezuela. However, most of the tax treaties provide for a withholding rate that is higher than the 4.95% rate for non-government lenders and, therefore, the standard rate of 4.95% will usually apply. Interest payments are deemed net income (Article 31).
Promissory notes in favor of local banks are subject to a Stamp Tax of 0.1% (Article 28 of the Stamp Tax Act). This tax does not apply to promissory notes issued and payable abroad.
Venezuela has income tax treaties with Austria, Barbados, Belarus, Belgium, Brazil, Canada, China, Korea, Cuba, Denmark, France, Germany, Indonesia , Iran, Italy, Kuwait, Malaysia, Norway, Netherlands, Portugal, Qatar, United States of America, United Kingdom, Czech Republic, Russia, Spain, Sweden, Switzerland, Trinidad and Tobago, United Arab Emirates and Vietnam, which contain special provisions for the taxes on some types of financing (see Newsletter on Tax Treaties).
- Creditors’ Rights in General.
Venezuela is a civil law country. Creditors’ rights in Venezuela are governed by the provisions of the Venezuelan Civil and Commercial Codes. Both were strongly influenced by the French and Italian codes, specifically the Italian pre-1942 codes. Secured creditors have a preference to collect from the proceeds of the sale of the collateral. Security interests may be created over multiple types of assets, including mortgages on real property, industrial machinery, equipment, aircraft and ships, and pledges on securities and other rights (see https://iclg.com/practice-areas/lending-and-secured-finance-laws-and-regulations/venezuela).
The Commercial Code has two procedures in case of insolvency of a corporation: moratorium and bankruptcy. If a corporation is not bankrupt but is unable to meet its payments in a timely manner, it may apply for a procedure of moratorium (atraso). The moratorium procedure suspends legal actions against the corporation, except for actions by secured creditors, tax credits, and labor credits. If a corporation is unable to meet its obligations and is in a state of insolvency, the corporation may be declared bankrupt. Bankruptcy procedures include the appointment of a trustee and the use of creditors’ committees. Secured creditors continue to have rights over the assets that comprise their security interest. Unsecured creditors are paid on a paripassu basis. Bankruptcy and moratorium procedures are both handled by a commercial court.
Bankruptcy rules do not apply to Venezuelan banks, insurance companies and securities operators, which, if in a state of insolvency, are intervened by the respective Superintendency (i.e. Superintendency of the Banking Sector Institutions, Superintendency of the Insurance Activity and National Securities Superintendency). Also, there are certain limitations on the foreclosure of security interest on assets dedicated to public services. Public services include electricity and transportation (for example, aircraft and ships).
In practice, over the past forty years, bankruptcy procedures in Venezuela have been very slow and the recovery by unsecured creditors has not been satisfactory. When a corporation finds itself in financial difficulty, usually it is better to try to work out the restructuring of the corporation using creditors’ committees and similar out-of-court mechanisms.
May 7, 2020