22 Jun Venezuelan Investment Treaties
When investing in Venezuela, one should consider making the investment through a legal entity protected under one of the investment promotion and protection treaties (hereinafter collectively referred to as the “Treaties” and individually as the “Treaty”) signed by Venezuela. The Treaties could reduce the political and exchange risks of the foreign investment. The political risk may be diminished thanks to the Treaty conditions regarding equal treatment, expropriation, compensation and dispute settlement procedures. Although Venezuelan law includes principles of equal treatment (non-discrimination) and expropriation protection procedures, the Treaty ranking and the dispute settlement procedures thereunder offer an additional safeguard.
In addition to the individual Treaties, the 1999 Investment Promotion and Protection Act (the “Investment Protection Act”) included provisions similar to those found in the Treaties. The act also ratified principles already established in other statutes and regulations. However, the Investment Protection Act was superseded by the Foreign Investment Act issued pursuant to Presidential Decree 1,238 of November 17, 2014, which curtailed some of the investors rights, including conditions for registering a foreign investment, establishing minimum amount of the investment, a minimum time for repatriation and restrictions on the remittance of profits. On December 29, 2017, the Constitutional National Assembly, which existence and validity is questionable, issued The Productive Foreign Investment Act, which supersedes the 2014 Act and eases some of its limitations.
If Venezuela has signed a specific Treaty with a particular country, the provisions of the specific Treaty prevail over the provisions of the investment legislation. The investment legislation has the effect of protecting foreign investments in Venezuela made by nationals of countries that are not party to a specific Treaty.
The Treaties cannot be amended or left without effect without complying with certain procedures and after a certain period of time has elapsed. This feature represents one of the most significant advantages of the protection granted thereunder, as opposed to the protection available under domestic law, as, for example, under the Investment Protection Act.
- Treaties presently in Effect.
Venezuela has signed and ratified Treaties with Holland, Argentina, Switzerland, Ecuador, Chile, Barbados, Portugal, the United Kingdom, Lithuania, the Czech Republic, Denmark, Peru, Brazil, Spain, Paraguay, Uruguay, Sweden, Canada, Costa Rica, Germany, France, Belgium, Luxembourg, Cuba, Iran, Belarus, Vietnam and Russia. In 2008, Venezuela denounced the Treaty it had signed with Holland. However, such Treaty will continue in effect for fifteen years after its termination for investments that had already been made. In 2006, Venezuela denounced the free trade agreement signed by Mexico, Colombia and Venezuela, which also included some investment protection provisions.
The various Treaties are similar though not identical. The following comments should be reviewed specifically for each individual Treaty, given that discrepancies may arise due to the particular conditions of any one Treaty.
The Treaty becomes applicable after the signatories notify each other of the satisfaction of the constitutional requirements for its binding effect. In the case of Venezuela, the approval of Congress is necessary. Some of the Treaties will be in effect for a particular term, except that the parties may terminate them with one-year advance notice.
The Treaties protect the investments made by persons, including individuals and legal entities of another country, and entities controlled by such persons, irrespective of whether they are based and have offices in the other country. Thus, for example, a subsidiary of a Chilean company may be protected by the Treaty, even though it is chartered and domiciled in a country that is not a signatory of a Treaty.
The export promotion and investment agencies of a country will be subrogated to the rights of the investors as regards the payment of an indemnification under the political risk policies they have issued.
The Treaties apply to the investors’ property and credit rights, including ownership of real estate, movable assets, security interest thereof, securities, intellectual property rights (patents, trade marks, copyrights) and concessions.
The Treaty is applicable to investments made before or after it has become effective, however, no claims are accepted for events or actions, which occurred before the Treaty became effective.
Under the Treaties, the parties must provide “national” treatment to the investors from the other country, that is, a treatment no less favorable than that accorded to national investors. Furthermore, the investors must be granted most-favored-nation treatment, that is, a standard of treatment not any less favorable than that accorded to investors from any other country. However, the most-favored-nation provision has some exceptions, including special treatment based on free trade agreements, customs unions or similar agreements, tax treaties and other specific agreements listed in the particular Treaty.
- Free Transferability.
The Treaties guarantee the free transferability and convertibility of the dividends and other profits resulting from the investment and the repatriation of the investment. Foreign exchange regulations should not affect the free transferability and convertibility rights. Based on these provisions of the Treaties, in the past, the Venezuelan Central Bank agreed to indemnify foreign investors for the exchange losses that resulted from a delay in the processing of foreign currency applications made during the exchange control that was in effect from July 1994 to April 1996. However, under the foreign exchange rules in effect until September of 2018, investors were required to complete certain filings for the purpose of obtaining approval for the remittance of dividends and under current foreign investment legislation there are limits on the amounts that may be remitted. The benefits of the Treaties were not evident under the administration of the exchange control, particularly during the last ten years.
Investors are protected against expropriation, nationalization or similar governmental action, unless such action stems from legal procedures based on public benefit, effected without discrimination and with a prompt, effective and adequate compensation. Indemnification for expropriation or similar actions must be made based on the market value of the object or asset, with interest at the commercial rate from the time of the expropriation, nationalization or other action until the indemnification is paid.
- Dispute Settlement.
Disputes between an investor and the country hosting the investment could, if amicable negotiation fails, be settled either before the courts of the latter or by means of international arbitration. Any dispute between the signatories will be settled via diplomatic channels, except that, if no solution is found (in many cases a term of six months is set), the parties may resort to arbitration. Each party will then appoint an arbitrator, and both of them will designate a third arbitrator. If no agreement is reached with respect to the appointment of the arbitrators, any party may request the president of the International Court of Justice to make the appointments. The award under the international arbitration will be final and binding.
In most cases (23 treaties), an arbitration procedure can be brought before the Center for Settlement of Investment Disputes (ICSID). Venezuela ratified the Convention on the Settlement of Investment Disputes between States and nationals of other States which established ICSID on April 3, 1995, but denounced it on January 24, 2012. Pursuant to Article 71 of such convention, the denunciation became effective six months after the notice. ICSID lists 17 cases pending against Venezuela and 32 are shown as concluded (see also: Investment Treaties and ICSID Jurisdiction).
Most treaties also foresee the possibility of using “ad hoc” arbitration, following the UNCITRAL Arbitration Rules. More recently treaties have referred to arbitrations before the International Arbitration Tribunal of the Paris Chamber of Commerce (sic) or the Arbitration Institute of the Stockholm Chamber of Commerce.
- Multilateral Investment Guaranty Agency (MIGA).
Venezuela ratified the MIGA agreement, effective 1993. Investments in Venezuela can, therefore, obtain MIGA coverage. Disputes arising out of investments with MIGA coverage are subject to special provisions of the MIGA agreement.
May 7, 2020