I INTRODUCTION

For multinational companies, corporate tax planning in Venezuela in recent years has been focused on transactions to adapt their businesses to the current local market, and in many cases on the sale of their businesses to local investors in distressed M&A transactions. The corporate tax work has been influenced by the country's political and economic situation, which includes hyperinflation and continuing devaluation of the local currency.2

The regulatory framework for income tax provides opportunities for structuring domestic transactions in a tax-efficient manner, although the increase of indirect taxes puts a heavy burden on Venezuelan companies' cash flows.

International transactions and investments in Venezuela can also be planned in a tax-efficient manner. Venezuela has a wide network of tax treaties that allows multinational companies to have ownership structures that may reduce Venezuelan withholding taxes applicable on outbound payments from their Venezuelan subsidiaries. The most relevant limitations are the Venezuelan transfer pricing and thin capitalisation rules.

The outlook of corporate tax planning in the short term will largely depend on whether the economic situation varies. If there are no changes, it is likely that the trend continues to be tax planning for distressed acquisitions and restructurings. If there is a change in economic policies and situation, it is possible that corporate tax planning shifts towards structuring new investments.

II LOCAL DEVELOPMENTS

Venezuela has tried to raise tax revenue mainly though indirect taxes, by increasing the standard VAT rate from 12 per cent to 16 per cent and the financial transactions tax rate from 0.5 per cent to 2 per cent, and creating special contributions.

Tax measures concerning direct taxation have also been taken, such as the elimination of the fiscal adjustment for inflation for large taxpayers, which was a mechanism that allowed taxpayers to take into account the effect of the Venezuelan inflation rate when computing income tax. This measure has resulted in the artificial increase of the income tax liability of a large group of taxpayers, particularly affecting insurance companies and banks.

This increase in the tax pressure and the Venezuelan political and economic situation have influenced the tax planning of many multinational companies, which have focused on restructuring or reducing Venezuelan businesses to adapt them to the current local market.

One of the most common strategies has been turning Venezuelan subsidiaries from full risk distributors to commissionaires. The commissionaires' structure has allowed certain multinational companies to continue operating in Venezuela, reducing risks and taxable income. The tax benefits of the commissionaire structure include potential reductions of income tax, and in certain cases of taxes that are calculated on gross revenue, such as municipal taxes and certain special contributions.

Several multinational companies have also tried to capitalise Venezuelan subsidiaries with financial deficits caused by the accumulation of intercompany debts with their non-Venezuelan shareholders or affiliated companies. To capitalise the Venezuelan subsidiaries, the most common transactions involve debt restructurings and capital contributions, mainly of the same intercompany debts owed by the Venezuelan subsidiaries.

Finally, the last developments in Venezuela affecting tax planning are the creation of a temporary tax advance payments regime in August 2018, and the enactment of a decree requiring certain taxpayers to pay national taxes (income tax, VAT) in foreign currency or cryptocurrencies in December 2018. In the context of hyperinflation and continuing devaluation of the local currency, the Venezuelan government has enacted these measures to collect national taxes faster and in hard currency, trying to mitigate the rapid decrease in value of tax payments, which are calculated and paid in local currency.

i Entity selection and business operations

Venezuela has different taxes levied at the national, state and municipal levels. The main national taxes are income tax, gift tax, VAT, financial transactions tax and certain special contributions. The principal state tax is the stamp tax applicable on certain transactions. Municipalities levy a tax on economic activities performed within their jurisdiction, as well as other taxes such as a tax on ownership of urban real estate property.

The main types of entities for conducting business in Venezuela, such as corporations and partnerships, are generally subject to such taxes in accordance with the applicable tax laws.

There are certain entities that may qualify as tax-exempt for purposes of several taxes, mainly depending on the entity type and the activities performed. Most of the tax-exempt entities under Venezuelan tax laws are non-profit civil associations, foundations or non-governmental organisations. However, there are some corporate entities that may qualify as tax-exempt if they are exclusively engaged in certain activities such as primary agricultural activities.

Entity forms

The most commonly used entity forms in Venezuela are:

  1. the corporation (SA);
  2. the limited liability company (SRL);
  3. the general partnership (SNC);
  4. the limited partnership (SCS); and
  5. the stock limited partnership (SCA).

Initially, all types of entities calculate income tax in the same way, deducting expenses from gross income to compute taxable income. However, some entities are taxed at the entity level and others are taxed at the level of the owners.

The SA, the SRL and the SCA are treated as separate legal entities for income tax purposes, paying tax at the entity's level. Owners of SAs, SRLs and SCAs may be subject to a dividends tax of 34 per cent of the amount of the dividend. The dividends tax only applies if the entity distributes dividends exceeding the taxable income reported at the entity level, pursuant to a calculation method set forth in the Venezuelan Income Tax Law.

The SNC and the SCS are fiscally transparent and any income or losses are passed through to the owners. The SNC and the SCS file an informational return and the owners pay any income tax due in their own tax returns.

There is no possibility of electing the tax treatment of Venezuelan entities and there are no rules about tax grouping or tax consolidation between related entities. Investors choose the entity type for both tax and non-tax reasons.

The preferred form of entity is the SA. However, for certain types of businesses, the use of fiscally transparent entities such as the SCS is common, mainly aiming to consolidate losses and income derived from the different businesses operated by the SCSs in a parent SA.

In addition, many foreign investors use SCAs, which are hybrid entities from the perspective of several jurisdictions. SCAs are taxed as corporations under the Venezuelan Income Tax Law, and are fiscally transparent or eligible entities under the laws of other jurisdictions. SRLs are not commonly used because their maximum stated capital under the Venezuelan Commercial Code is limited to an amount that is currently immaterial.

Corporations

An SA is owned by shareholders and is a legal entity separate and distinct from its shareholders.3 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.

Limited liability companies

An SRL is owned by members, who enjoy limited liability like the shareholders of a corporation. The capital of the SRL is represented by quotas. In case of transfer of a quota owned by a member, the other members have a preferential right to acquire such quota.

General partnerships

An SNC is owned by partners. The partners are jointly and severally liable for any debts, obligations and liabilities of the general partnership (unlimited liability). A general partnership must have at least two partners.

Limited partnerships

An SCS is owned by at least one general partner and at least one limited partner. The general partners are jointly and severally liable for the debts, obligations and liabilities of the limited partnership, whereas the liability of the limited partners is limited to the amount they agree to contribute to the limited partnership.

Stock limited partnerships

An SCA is similar to an SCS, except that the limited partners' equity interest is represented by shares, and the regime of the limited partners is similar to that applicable to the shareholders of a corporation. Moreover, the managing partner may be removed by resolution of the shareholders' meeting, and the partners that do not agree with the removal are entitled to withdraw from the stock limited partnership. In case of removal without cause, the managing partner must be indemnified; dissenting partners may withdraw from the SCA.

Domestic income tax

Determination of taxable income

Resident entities are subject to income tax at rates of up to 34 per cent, set out in the progressive schedule provided in the Venezuelan Income Tax Law (15 per cent, 22 per cent and 34 per cent).4 Non-residents are subject to income tax at the rate of 34 per cent on their Venezuelan source income or income attributable to a permanent establishment in Venezuela.

Income tax is levied on net taxable income, which is calculated by subtracting from the annual gross revenue costs and allowable deductions (e.g., salaries, interest, amortisation, depreciation, technical assistance, and any expense that is 'normal and necessary' to generate income).

Expenses that are 'normal and necessary' to produce income may be deducted.

Taxable income must be reported on an accrual basis, except for income from salaries and fortuitous gains, which are taxed on a cash receipt basis.

Losses

Net operative losses may be carried forward for three years, and offset up to 25 per cent of the yearly taxable income of the taxpayer. Net operative losses may survive a change of ownership.

Withholding on outbound payments

Certain types of Venezuelan source income earned by non-residents are subject to a presumptive income regime, and absent the application of a tax treaty, are subject to withholding tax. For example:

  1. Payments of royalties to a non-domiciled entity are subject to a withholding levied at the progressive corporate rate of up to 34 per cent on 90 per cent of the gross payment.
  2. Payments of technical assistance fees to a non-domiciled entity are subject to a withholding levied at the progressive corporate rate of up to 34 per cent on 30 per cent of the gross payment.
  3. Interest payments made to non-resident entities are subject to a withholding levied at a progressive corporate rate of up to 34 per cent on 95 per cent of the payment.
  4. Interest payments made to qualified financial institutions domiciled outside Venezuela are subject to a withholding tax of 4.95 per cent.
Dividend tax

Shareholders, members or partners of Venezuelan SAs, SRLs and SCAs may be subject to a dividend tax of 34 per cent. The dividends tax only applies to the portion of the dividends exceeding the profits taxed at the level of the entity. The determination of whether the dividend tax applies is made following a method set out in the Venezuelan Income Tax Law.

Typically, Venezuelan corporations plan by performing the calculation of the dividend tax provided in the Venezuelan Income Tax Law before deciding the amount of the dividends to distribute, if any.

Branch and permanent establishment

Foreign entities may operate in Venezuela through a permanent establishment. A branch, a fixed place of business, place of effective management and an agent with authority to enter into contracts is considered a permanent establishment. The threshold for a foreign entity to have a permanent establishment in Venezuela is lower under the Venezuelan Income Tax Law in comparison with the tax treaties in effect in Venezuela.

The permanent establishment is taxed on income attributable to the permanent establishment's activities. Deductions of expenses incurred for the purpose of the permanent establishment are allowed, including executive and general administrative expenses. Interest, technical assistance fees or royalties payments made to the head office and its affiliates are not deductible, but interest, fees and royalties paid to other entities are deductible.

The Venezuelan branches of foreign legal entities are subject to a deemed dividends tax on their earnings. The deemed dividends tax is levied at a flat rate of 34 per cent on the excess amount of the branch's 'financial earnings' over the branch's 'net taxable income'. The deemed dividends tax is exempted if the branch reinvests in Venezuela the amount subject to the deemed dividends tax and the investment is maintained in Venezuela for five years.

International tax

The calculation of the foreign source income is made by deducting foreign source expenses from foreign source gross income. Foreign source income is subject to tax at the progressive rates of up to 34 per cent. Foreign source dividends are subject to a proportional rate of 34 per cent. Foreign source losses may not offset Venezuelan source income.

Tax residents may credit income taxes paid abroad against the tax liability resulting from the foreign source income. In addition, some of the tax treaties signed by Venezuela provide for the exemption method to eliminate double taxation.

As a general rule, foreign entities are deemed separate legal taxpayers under the Venezuelan Income Tax Law. Therefore, tax residents holding an interest in foreign entities are not subject to Venezuelan income tax unless the foreign entity distributes dividends. Exceptionally, foreign entities can be fiscally transparent if the foreign entities either qualify as controlled investments in a low tax jurisdiction in accordance with the Venezuelan CFC rules; or must be treated as fiscally transparent under the rules of a tax treaty signed by Venezuela. This provides opportunities for tax planning. Venezuelan residents may achieve income tax deferral from foreign source income, even from passive income, to the extent that the non-Venezuelan businesses are not conducted in low tax jurisdictions. The Venezuelan CFC rules generally apply only if the foreign subsidiary is located in a low tax jurisdiction and the Venezuelan resident is deemed to control the foreign subsidiary.

Capitalisation requirements

Venezuela has thin capitalisation rules that limit the deduction of interest paid to related parties if a 1:1 debt-to-equity ratio is exceeded. The debt-to-equity ratio and the related-party interest deduction allowed are calculated using the method provided in the Venezuelan Income Tax Law. The Venezuelan thin capitalisation rules also provide that debts between related parties that are not at arm's-length terms must be deemed equity and, therefore, interests paid on such debts are not deductible for tax purposes.

ii Common ownership: group structures and intercompany transactions

Ownership structure of related parties

To the extent applicable, describe the tax planning considerations of any topics of particular note arising from your jurisdiction's rules related to:

  1. tax grouping and loss sharing;
  2. controlled foreign corporations; and
  3. tiered partnerships.

Venezuela does not have tax grouping or loss sharing rules. Venezuelan companies generally structure their businesses by incorporating SAs, as it is the preferred entity type. It is possible to have a local structure consisting of a holding SA and underlying operating SAs because there is no double taxation on dividends received from other Venezuelan SAs. However, there are some taxpayers that prefer to use fiscally transparent entities to consolidate income or losses in a parent entity.

Domestic intercompany transactions

There are opportunities for tax planning in domestic intercompany transactions. Related-party payments that may reduce overall net income are allowed if the expenses comply with the general deduction requirements of the Venezuelan Income Tax Law. Moreover, deducting losses generated from related party transactions is permitted.

A strategy occasionally implemented to utilise losses of related companies is merging companies with losses with companies with taxable income. These restructurings are possible because net operative losses can survive changes of ownership.

The Venezuelan Income Tax Law sets forth certain limitations to domestic intercompany transactions. For example, loans made by Venezuelan entities to shareholders (entities or individuals) are characterised and taxed as dividends if such loans do not meet certain requirements such as bearing interest and not being repaid before the end of the fiscal year.

Another limitation is the general anti-abuse clause (GAAR) of the Venezuelan Tax Code, which allows the tax authorities to disregard transactions, contracts and legal forms if the tax authorities can prove that they lack economic substance and have been entered into with the sole purpose of reducing taxes.

International intercompany transactions

The main Venezuelan income tax rules applicable to international intercompany transactions are the transfer pricing, the thin capitalisation and the CFC rules. These rules limit the ability of Venezuelan taxpayers of shifting income to low-tax jurisdictions or to enter into related-party transactions that are not under arm's-length terms.

Transfer pricing rules

The Venezuelan Income Tax Law sets forth transfer pricing rules that require Venezuelan taxpayers to report related-party transactions under arm's-length terms for income tax purposes. The Venezuelan transfer pricing rules are based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TP Guidelines), which are applicable on a supplementary basis provided that they are congruent with the Venezuelan Income Tax Law and international treaties signed by Venezuela. The OECD TP Guidelines are commonly applied in Venezuela and certain tax courts have used them as a source for interpreting the Venezuelan transfer pricing rules.

Venezuelan transfer pricing rules apply to transactions between Venezuelan taxpayers and related parties, and they cover both income and capital transactions. The Venezuelan tax authorities may adjust the profits reported by Venezuelan taxpayers by imputing income or reducing or denying deductions if transactions have been entered into between related parties on non-arm's length terms. Transfer pricing adjustments only generate income tax consequences and do not have any other legal implications.

CFC rules

The Venezuelan Income Tax Law sets forth an anti-deferral regime called International Tax Transparency Rules, which require Venezuelan residents (individuals or entities) who hold investments located in low-tax jurisdictions to report income earned by the investments, e.g., a foreign subsidiary, even if the investment has not distributed dividends or benefits to the Venezuelan resident.5 The obligation of reporting income derived from investments located in low tax jurisdictions only applies if the Venezuelan resident is deemed to control the investments, because it either manages the investments or controls the timing of the distributions of benefits or dividends of the investment. Certain exceptions apply, for example, the international tax transparency rules do not apply if a foreign subsidiary located in a low-tax jurisdiction earns income from active business activities.

iii Third-party transactions

Sales of shares or assets for cash

Sales of shares of Venezuelan companies are typically preferred to asset deals because generally they only generate income tax consequences, whereas the sale of assets located in Venezuela may trigger income tax, VAT and transfer taxes.

Since the sale of assets or of transfers of ongoing concerns usually has an important VAT effect, a common structure consists of the seller contributing the assets or the ongoing concern into the equity of a newly formed entity, and subsequently selling the shares of the newly formed entity to the purchaser. This structure mitigates the VAT effect of the asset deal, because the contribution of all or most of the assets of a Venezuelan entity into a newly formed entity that continues the same line of business of the entity making the contribution is not subject to VAT under the VAT Law and regulations thereunder. The subsequent sale of the shares is not subject to VAT either.

Sales of shares

Capital gains realised on the sale of shares of Venezuelan companies are subject to income tax with the rate of up to 34 per cent. The gains or losses are determined by the difference between the sale price and the seller's tax basis in the shares.

The sales of shares of Venezuelan companies are subject to a withholding tax of 3 per cent in the case of resident individuals, 34 per cent in the case of non-resident individuals, and 5 per cent in the case of entities (Venezuelan or foreign entities). The withholding tax does not apply if purchase price is not paid in cash, i.e., the payment is made in kind. The withholding tax does not apply if the capital gains are not subject to Venezuelan income tax under a tax treaty.

Losses realised on the sale of shares of Venezuelan companies are deductible for Venezuelan income tax purposes if certain conditions are met, such as a holding period of two consecutive years.6

Capital gains realised on the sale of shares listed on the local stock exchange are subject to a flat income tax of 1 per cent levied on the purchase price and withheld by the stock exchange.

Sales of assets

Capital gains realised on the sale of assets located in Venezuela are subject to income tax with the rate of up to 34 per cent. The gains or losses are determined by the difference between the sale price and the seller's tax basis in the assets.

If the sale of assets qualifies as the sale of an ongoing concern, the sale is subject to a withholding tax of 34 per cent in the case of resident individuals, 34 per cent in the case of non-resident individuals, and 5 per cent in the case of entities (Venezuelan or foreign entities). The withholding tax does not apply if purchase price is not paid in cash (i.e., the payment is made in kind). An ongoing concern may be considered a permanent establishment under tax treaties, and withholding taxes, if applicable, are not reduced under tax treaties signed by Venezuela in such cases.

In addition to the income tax effects described above, sales of assets are subject to VAT with the standard rate of 16 per cent, applicable to all tangible movable assets being transferred. VAT does not apply to the sale of intangible assets or real estate property. Moreover, if the sale of assets qualifies as the sale of an ongoing concern, stamp tax of 5 per cent of the sale price applies.

Tax-free or tax-deferred transactions

Some types of transactions may be performed tax-free, although there are no tax-free specific regimes available. For example, mergers do not generate tax implications for the companies merged other than the transfer of the tax attributes and liabilities from one company to the other, and may only generate income tax consequences for the shareholders to the extent that they realise gains as a result of the merger.

Liquidations or winding-up transactions are not tax-free and may trigger tax consequences for the shareholders of the companies being liquidated or wound up. Share-for-share exchanges may also trigger Venezuelan taxes.

iv Indirect taxes

The most relevant Venezuelan indirect taxes are the VAT, the financial transactions tax (FTT) and the municipal tax on economic activities (MTE).

VAT

The Venezuelan VAT applies to sales of tangible goods, the provision of services and the import of goods into Venezuela. 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), passing down the VAT to the end consumers. VAT liability (excess of output debits over input credits) is paid monthly, and in certain cases weekly, by taxpayers to the Venezuelan treasury. Currently, the standard VAT rate is 16 per cent. Sales of immovable property, stocks and intangible property are not subject to VAT.

Certain special VAT taxpayers designated by the 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. The monthly amount withheld to a taxpayer in excess of the monthly VAT payable by such taxpayer (VAT output debits over VAT input credits) is refundable, but the process to obtain the refund may be lengthy and difficult. Therefore, this withholding regime puts pressure on VAT taxpayers' cash flow.

Financial transactions tax

The FTT applies to legal persons (not individuals) appointed as special taxpayers who are: (1) making payment transactions through Venezuelan banks or financial accounts; and (2) paying debts outside the financial system by means of payments, novation, offsetting and forgiveness of debts.

The FTT also applies to legal persons legally related to special taxpayers and to legal persons or individuals making payments on behalf of special taxpayers. The FTT rate is 2 per cent, and its tax base is the amount of the transaction.

Municipal tax on economic activities

Venezuelan municipalities levy the MTE on businesses conducting activities within their municipal jurisdiction. The MTE's taxable base is the gross income effectively connected with the activities conducted within the municipality, and the tax rates vary in each municipality in accordance with their municipal tax laws and mainly depending on the industry or type of activity in which the taxpayer is engaged.7 The MTE is income tax deductible.

Multinational companies with presence in Venezuela often consider conducting their activities in municipalities that may offer a favourable tax regime or tax incentives. The planning around MTE also takes into account the effects of activities carried out across several municipalities and the avoidance of potential economic double or multiple taxation.

III INTERNATIONAL DEVELOPMENTS AND LOCAL RESPONSES

After adapting its transfer pricing rules to the OECD TP Guidelines in 2001, Venezuela has not adopted any of the international tax proposals of recent years. The Venezuelan tax authorities have not published their intention of implementing any of the BEPS recommendations or taking actions in response to the European Commission's proposals on taxation of the digital economy or similar issues.

i Tax treaties

Venezuela has signed double taxation avoidance treaties with the following countries: Austria, Barbados, Belarus, Belgium, Brazil, Canada, China, Cuba, Czech Republic, Denmark, France, Germany, Indonesia, Iran, Italy, Kuwait, Malaysia, The Netherlands, Norway, Palestine, Portugal, Qatar, Russia, South Korea, Spain, Sweden, Switzerland, Trinidad and Tobago, United Arab Emirates, United Kingdom, United States, and Vietnam. In 2018, Venezuela also signed a tax treaty with Turkey, which has not entered into effect.

Notable typical or model provisions

The tax treaties signed by Venezuela are mainly based on the OECD Model Tax Convention on Income and on Capital, and some of them include clauses based on the UN Model Double Taxation Convention. All of the tax treaties signed by Venezuela contain a mutual agreement procedure clause.

Many of the tax treaties exempt capital gains realised on the transfer of shares of Venezuelan companies from Venezuelan income tax. Most of the tax treaties reduce or eliminate the domestic withholding rates applicable to dividends (34 per cent), royalties (30.4 per cent) and interest (32.3 per cent).

Recent changes to and outlook for treaty network

Most of the recent tax treaties were entered with new partners such as China, Russia and Turkey, countries with significant investments in Venezuela.

There is no public information available about plans of renegotiating tax treaties.

IV RECENT CASES

i Perceived abuses

The Venezuelan tax authorities have applied the GAAR in certain cases that have been reviewed by the Venezuelan Supreme Court. The most relevant rulings are not recent, but they provide general guidance to taxpayers when structuring their transactions.8 The statutory language of the Tax Code and the available case law show that the GAAR must be applied on a case-by-case basis and that, for the purposes of its application, the tax authorities have the burden of proving that the taxpayers have entered into transactions or adopted forms with lack of economic substance and with the sole purpose of reducing their tax liabilities.

ii Recent successful tax-efficient transactions

There are no recent published tax rulings about tax-efficient transactions available. However, some multinational companies have restructured intercompany debts and capitalised their Venezuelan subsidiaries in tax-efficient ways. Some of the key tax issues in restructuring intercompany debts have been to avoid straightforward debt discharges that may trigger gift tax (up to 55 per cent) and reducing the impact of the financial transactions tax (2 per cent), which may apply on cancellations of debt. In capitalisations of Venezuelan subsidiaries, the key issue has been to mitigate the effect of stamp taxes applicable on the increase of the stated capital (ranging between 1 per cent and 4 per cent of the increase of the stated capital) by, for example, issuing shares with premium, which may result in a lower stamp tax effect.

V OUTLOOK AND CONCLUSIONS

Venezuelan tax laws allow multinational companies to structure their transactions in tax-efficient ways. However, the recent increase of indirect taxes and the elimination of the adjustment for inflation for large taxpayers has put high pressure on multinational companies operating in Venezuela.

The outlook of corporate tax planning in the short term will largely depend on whether the economic situation changes. If there are no changes, it is likely that the trend continues to be tax planning for distressed acquisitions and restructurings. If there is a change in the economic policies and situation, it is possible that corporate tax planning shifts towards structuring new investments, tax incentives and possibly the relief of taxation of many transactions and projects that will need to be implemented to recover the Venezuelan economy.


Footnotes

1 Alberto Benshimol, Humberto Romero-Muci and José Valecillos are partners at D'Empaire.

2 According to the International Monetary Fund, Venezuela's inflation rate in 2018 was of 1.3 million per cent and it projects that it will hit 10 million per cent in 2019: www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN.

3 The corporation is also known as compañía anónima (CA).

4 The following types of income are subject to different proportional rates: (1) 50 per cent to income derived from primary oil activities, (2) 60 per cent to income derived from mining activities, and (3) 40 per cent to income derived from financial, banking and insurance activities.

5 According to the Rules on Low-Tax Jurisdictions for Income Tax Purposes (LTJ Rules), a jurisdiction with an income tax rate of 20 per cent or less is considered a low-tax jurisdiction. Jurisdictions with an income tax rate of 20 per cent or less with which Venezuela has entered into a double taxation agreement containing an effective exchange of information provision are not considered low-tax jurisdictions. The LTJ Rules also list jurisdictions deemed to be low-tax jurisdictions.

6 The conditions are: (1) that the acquisition cost of the shares was not higher than its quoted price on the stock exchange, or that it is reasonable if compared with the book value of the company; (2) that the seller has owned the shares during a consecutive period of at least two years; and (3) that the seller proves to the tax authorities that the Venezuelan companies had a reasonable economic activity during the two years before the sale of shares that generates the losses.

7 Venezuelan municipalities have autonomy to establish their own tax laws and tax rates, within certain limits set forth in the Venezuelan constitution and a national law regulating the MTE.

8 In Organización Sarela v. Republic of Venezuela (Venezuelan Supreme Court, 16 July 1999) the Political-Administrative Chamber asserted that the tax authorities must apply the substance over form rule and similar anti-abuse clauses carefully. The rationale of this ruling was that the application of the GAAR cannot arbitrarily violate the economic freedom principle, which for tax purposes implies that taxpayers cannot be forced to structure their businesses in the most inefficient tax form. In Hidrocarburos y Derivados CA v. Republic of Venezuela (Venezuelan Supreme Court, 3 February 1999), the Supreme Court upheld the tax authorities' re-characterisation of a transaction between related parties that implied taking advantage of certain tax benefits, ruling that the taxpayer set up the transaction with the sole purpose of decreasing its tax liabilities. In this case, the taxpayer had purchased certain fixed assets that entitled the taxpayer to income tax abatements. The taxpayer purchased the assets to an intermediary company with cash, on the same day that the intermediary company had purchased the assets from a related party of the taxpayer with a 30-year credit and for the same price it was sold to the taxpayer. The funds to purchase the assets came from a taxpayer and ended up flowing to the same taxpayer immediately. The Supreme Court evaluated these facts among other evidence and ruled that there was no other purpose to the transaction than to obtain the income tax abatements before the end of the tax year.

In Proagro CA v. Republic of Venezuela (9th Tax Court of Caracas, 13 July 1999) the taxpayer requested a ruling from the tax authorities regarding the application of a VAT exemption to the activities the taxpayer jointly conducted under a participation agreement entered into with a related taxpayer. The tax authorities ruled that the agreement entered into by the taxpayers had the sole purpose of reducing tax liabilities, because they were not conducting a joint activity, rather they were rendering services to each other. Therefore, the services should have been subject to VAT. The 9th Tax Court held that the participation agreement had economic substance and was appropriate to the purpose of the activities carried out by the taxpayers, because under the participation agreement the taxpayers were sharing costs and distributing risks connected with their activities, all with the purpose of obtaining economic benefits. The 9th Tax Court ruled that the tax authorities did not prove that the agreement was entered into with the sole purpose of reducing tax liabilities, and therefore that the forms adopted by the taxpayers must be respected. The 9th Tax Court decision was upheld by the Supreme Court on 14 July 2009.