Venezuela: ICLG Project Finance Laws and Regulations Venezuela 2022
1.1 What are the main trends/significant developments in the project finance market in your jurisdiction?
There are no significant changes to report in terms of trends in project finance for Venezuela over the last year, as no standard project finance – as understood by international markets – has been advanced in Venezuela for well over a decade. Most project-financed structures were collapsed after the migration of joint venture vehicles in oil and gas into corporate vehicles in which Venezuela and its instrumentalities hold a majority stake (dubbed empresas mixtas), or were otherwise expropriated/taken over by state-owned entities.
In any case, for the first half of the past decade, some of said empresas mixtas projects resorted to financing hedged on oil produced and traded (mostly as alternative sponsor financing, including long-term accounts receivable (A/R) secured financing and commodity-secured financing – with some elements of forward-purchase financing). The structure was to expand to a wide array of oil and gas projects as well as projects in other extractive industries, but ultimately did not.
The causes for this were political turmoil (2016 and 2017), material macroeconomic issues (hyperinflation and maxi-devaluation, 2017–2022), the imposition of sanctions on the Venezuelan government and Petróleos de Venezuela, S.A. (PDVSA) by the U.S. Treasury Department (2017 and 2019, to date), and poor public policy on investment.
In the current environment, non-recourse projects are inexistent and it is likely that this will continue into the near future, in light of current issues.
1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years?
There have been no significant project financings in recent years and, unless there are material changes in the legal framework, it seems unlikely that any new project financings will take place in the near future.
2.1 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?
The laws of Venezuela do not provide for the granting of a general security agreement. The Civil Code, Code of Commerce and special laws call for certain types of security associated with the property to be encumbered (personal, real estate, or certain assets such as equipment and machinery), identifying the particularities and formalities needed for the security to be properly set up and enforceable. While general security agreements are granted in international projects and other forms of financing, the same are commonly used as umbrella agreements, from which there stem particular security agreements depending on the nature of the security to be granted. Practice also results in particular security agreements being drafted for assets located in Venezuela, as different formalities and filings would apply for the same to be valid and enforceable.
2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure?
Security over immovable property, plant or buildings erected on a permanent basis over or under land is granted pursuant to a formal mortgage under the Civil Code (which would clearly include pipelines, whether underground or overground). Such a mortgage may also be granted over any real estate rights over such immovable property, e.g., over usufruct rights or easements.
Machinery and equipment may also be mortgaged or pledged as appropriate by following the formalities under the Law of Chattel Mortgage and Pledge without Transfer of Possession.
Mortgages in general and pledges without the transfer of possession need to be agreed upon, and the relevant deed would need to be formally logged with the Civil Public Registrar Office of the circuit where the property is located (logging before the Registrar is an essential formality, without which the security will render no legal effects).
2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security? Briefly, what is the procedure?
Under Venezuelan law, the charge may not result in the appropriation of the secured property prior to or in case of default, and in the latter only after the carrying out of legal auctioning proceedings (with the exception of pledges on cash). In the particular case of a security (pledge) over receivables, the security must be clearly identified and documented and the debtor must always be notified of the security for it to be valid, with the exception of obligations evidenced in negotiable or bearer instruments, for which no prior notice to the debtor is required.
In the case of export commodities, it is common to use an overseas marketing entity that assigns its receivables as a security. A domestic alternative to a standard pledge is to set up a fideicomiso (somewhat akin to a trust) with a bank in which the amounts/property are to be deposited by the debtor. In any case, current equity ratio limitations applicable to local banks when setting up fideicomisos largely restrict their current use in large projects (in light of the limited size of the local banking marketplace).
Practice has evidenced that local banks may refrain from advancing such alternative as it may be prone to litigation.
2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure?
Yes, cash in a bank account can be subject to a pledge. A pledge over cash allows the creditor to appropriate the cash without court intervention upon an uncured default event.
2.5 Can security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure?
Yes, security can be taken over shares in companies incorporated in Venezuela by means of a pledge. The share-pledge deed must have a certain date ( fecha cierta) provided by executing the pledge before a notary public, and the pledge is perfected when it is logged in the shareholders’ ledger of the company and the share certificates (if the same have been issued, which is neither mandatory nor customary) are handed over to the pledgee.
2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables and chattels)?
Fees will vary depending on the security granted. In the case of mortgages (in general) and pledges without transfer of possession, registration fees are to be paid on the basis of the secured amount over the property, which will be payable as a prerequisite for registration and may be substantial. Furthermore, as security is to be issued in local currency, the same may need to be reinstated over time due to inflation or devaluation.
Notarisation of documents requires the payment of stamp duties and fees based on the length of the documents, but such fees and duties are commonly immaterial. A recent amendment of the Venezuelan Registry and Notary Law (December 2021) introduced material upward adjustments on fees to be paid (computed on the basis of the variation of the value of the Venezuelan sovereign cryptocurrency “Petro”, or “PTR” (as of March 2022, the value of one Petro is approximately USD 59.54)).
In any case, notarisation fees would not exceed the value of 10 Petros (i.e., approximately USD 600.00 at March 2022).
Costs associated with the set-up of security on real estate and real estate rights range between 0.5% (up to USD 30,000) to 2% (in excess of USD 60,000) on the secured value.
The same rules and fees are applicable to the case of mortgages on movable property and pledges without transfer of possession, as well as the set-up and contribution of assets to a fideicomiso. On the other hand, a stamp duty tax (Article 91 of the Venezuelan Registry and Notary Law) will be triggered in the case of set-up of mortgages (movable or immovable property), pledges (with or without transfer of possession) and any other kind of encumbrances or securities, as well as the transfer or contribution of assets or property to fideicomisos. Nonetheless, the same is not computed on the basis of Petros but on Tax Units (“UTs”; currently, one UT is equivalent to VEB 0.02 – i.e., less than 1 cent of a US dollar), and is capped at five UTs when the security value exceeds 6,501 UTs (i.e., USD 30.00).
2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?
Registration for mortgages over immovable property, certain movable property and pledges without a transfer of possession require a significant amount of time and expense, as they involve submission before Civil Public Registrars. The costs can be compounded as the amount of the lien is provided in bolivares (local currency) and, as the same depreciates, there may be a need to update (reinstate) the mortgage to secure full coverage, as referred to above. Notarisation, in the case of standard pledges or assignments of credits in guarantee, commonly does not require a significant amount of time or expense.
2.8 Are any regulatory or similar consents required with respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?
Regulatory consent is not generally required for the creation of security (mortgages or pledges), but certain consents may be required for the granting of securities in economic sectors reserved by the state (hydrocarbons, mining and telecommunications, among others) or when the grantor is a state-owned entity.
Mortgages on movable property and pledges without transfer of possession can only by granted in favour of banks and other financial institutions licensed to operate in Venezuela, foreign financial institutions authorised by the Superintendence of Banks and Financial Institutions, or certain other entities which may be authorised but which relate to security over a very particular type of property (e.g. entities authorised by the Ministry of Agriculture for certain equipment and machinery).
Public Registrars require prior submission of the relevant payment slips for income tax (when applicable) as well as a municipal tax compliance certification with immovable property tax for registering documents setting up security on real estate.
3. Security Trustee
3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the lenders?
A security trustee or agent may be appointed to enforce the security and to apply the proceeds thereon to the claims of all lenders. In any case, recognition of a “foreign trust” and the extent of the ability of the foreign trustee or agent to enforce the security and apply the proceeds relies mostly on the interpretation of the principles of contractual freedom and agency, and certain limitations may be construed to apply in the foreclosure of assets.
3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?
It is common to set up a local trust ( fideicomiso) structure with a local (registered) financial institution to hold local security on behalf of lenders, as there are particular provisions dealing with fideicomisos and their ability to enforce rights over property contributed to the same or security granted in its favour. In any case, as discussed in question 2.3, in light of equity ratios required by the competent authority, at the current time there are clear practical issues in using this alternative.
4. Enforcement of Security
4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/liquidator), or (b) (in respect of regulated assets) regulatory consents?
Any agreement under which the creditor may take over secured property (other than cash) without court intervention will be null and void. Under Venezuelan law there is a requirement to place the secured property up for public auction, which is likely to significantly impact the timing and value of enforcement (the value of the security will be identified in bolivares (local currency), of which the value can be significantly eroded pursuant to inflation/devaluation). Furthermore, in case bankruptcy procedures are initiated, the pledge will remain in place but foreclosure and execution will be consolidated in and advanced by the bankruptcy court.
Foreclosure of assets owned by state-owned entities or used in activities that can be considered of “public interest” or in the rendering of a “public service” is subject to a stay for service of notice to the Attorney General of Venezuela, and may eventually be limited due to the nature of the activity to which the assets are devoted.
4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies?
No general restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies, but as discussed above, for certain industries and projects, foreclosure may be subject to particular proceedings or consents (extractive industries, public works concessions, among others) and may be further limited depending on whether the asset is used in an activity deemed a public service or of public interest.
In any case, there are certain liabilities that rank senior by operation of the law, such as those related to taxes, the environment, government credits (e.g. royalties), and labour.
5. Bankruptcy and Restructuring Proceedings
5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the security?
Bankruptcy proceedings over the project company will affect the timing for collection (while keeping intact the priority rights of the secured creditors), as any foreclosure over secured assets would need to be advanced before the court in charge of the bankruptcy proceedings (or consolidated into the same), and procedural issues (e.g. appointment of a receiver, identification of creditors, among others) are likely to delay any foreclosure and distribution of proceeds. Such delay may affect the secured creditor in an adverse and material way, as the lien is denominated in local currency and hence will decrease in USD terms in an inflation/devaluation scenario, with the issue that once bankruptcy proceedings are in place, the project lender will not be able to reinstate the amount of the lien to achieve full coverage.
5.2 Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g. tax debts, employees’ claims) with respect to the security?
Venezuelan law identifies certain privileges over particular assets or the property of a person (say, a project company). Some of them apply under bankruptcy proceedings, while others would apply in the event of execution/foreclosure.
All expenses and court fees incurred for conservation of property for the benefit of the creditors, as well as payment of taxes, contributions and duties, and payment of workers and employees, have a first privilege over the movable assets of the debtor. In the case of immovable property, expenses incurred in their attachment and auction, taxes, registration fees, and payment of workers and employees have first privilege. With regard to clawbacks, the bankruptcy court may identify a “suspect period” of up to two years prior to the date the bankruptcy is declared by the court. Any act or transaction made or entered into within said term is subject to review of the court and could, eventually, be disregarded if considered to have been entered for the purpose of defrauding other creditors.
5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?
All commercial entities are subject to bankruptcy proceedings, even state-owned entities, but the proceedings in the case of the latter will require the participation of the Attorney General’s Office, further delaying any bankruptcy proceedings. In either case, if the assets involved are assets used for the provision of “public services” (e.g. under a build-own-operate concession), the case may be that there will be a significant delay in executing any of said assets (which in practice may render the same unenforceable).
In any case, there is a view – not covered in the statutes or by administrative or court authority – that certain entities which, due to their activities and functions, can be considered essential, i.e. government instrumentalities, would be excluded from bankruptcy.
5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement?
Once a bankruptcy process is initiated against a project company, all seizure or enforcement proceedings will be consolidated (accumulated) into the bankruptcy proceedings.
5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors?
The Venezuelan Code of Commerce recognises two different insolvency proceedings, namely bankruptcy (quiebra) and receivership (atraso). Under Venezuelan law, both proceedings are aimed at the liquidation of the company and not at the reorganisation of the businesses for continuation, and both are advanced before the Commercial Court. Certain alternative proceedings for reorganisations are provided or may result from special regulations (e.g., inter alia, banking, insurance, capital markets) requiring the participation or oversight of the competent regulator, and which may result in company intervention by receivers appointed by the competent authorities.
5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction.
The directors of a company in financial difficulties do not confront any limitations until formal proceedings for receivership or bankruptcy are advanced before the courts. Once proceedings are initiated, the same will see their powers: limited, in the case of receivership, to keeping minor day-to-day operations; restricted, if an injunction is granted by the Commercial Court prior to a decision on the bankruptcy; or stripped, in the case of the previous, and once bankruptcy has been formally declared by the courts.
Intervention by the competent regulator in certain areas of industry may encompass different measures resulting in limitations, restrictions or the replacement of the board and management with an authority-appointed receiver or board.
The directors may be subject to fines, criminal penalties and a ban on the exercise of commerce if they are considered to have committed acts of gross negligence or wilful misconduct (fraud) leading to a bankruptcy qualified as guilty or fraudulent.
6. Foreign Investment and Ownership Restrictions
6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company?
Some areas of the economy are reserved for national investment, such as TV, radio broadcasting, and newspapers in the Spanish language. In other areas such as oil exploration and production (E&P), iron ore and bauxite extraction as well gold, gems or tantalium mining, participation of private parties is only allowed in association with state-owned entities. In the case of oil and most mining E&P, co-venturing with state-owned entities requires the latter to control more than a 50% stake in the equity of the “mixed enterprise” (an incorporated joint venture in the form of a sociedad anónima, somewhat akin to a corporation or company), which requires positive control by the state-controlled entity on material decisions. There are significant restrictions in practice (not by law) on access to foreign currency for capital repatriation and dividend distributions.
Following the passing of the Constitutional Law on Productive Foreign Investments on December 2017, some legal limitations now apply to foreign ownership regarding capital repatriation and dividend distributions.
6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection from such restrictions?
Venezuela has 26 bilateral investment treaties (BITs) in place to date (the treaty between the Kingdom of the Netherlands and Venezuela must be singled out as it lapsed in 2007 without being renewed). All of said treaties provide for obligations to grant, inter alia, fair and equitable treatment, full protection and security, non-discrimination, protection against illegal expropriation, access to foreign currency for remittances and repatriation, and most-favoured-nation (MFN) treatment. Significantly, most BITs allow for access to institutional arbitration (an alternative, given that Venezuela denounced the International Convention on the Settlement of Investment Disputes (ICSID) in January 2012, and claims made after this seem to fall outside the scope of ICSID; see ICSID cases ARB/12/21 and ARB(AF)/18/3).
Our experience has evidenced that protection under the same is somewhat limited in practice, even as Venezuelan administrative authorities and courts have acknowledged standing BITs, as (i) litigation has been protracted, and (ii) there is nothing to show that enforcement within Venezuela will take place.
6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?
Expropriation according to the Constitution and relevant expropriation law can only take place for reasons of public interest (obra de utilidad pública), after due judicial process and on the basis of fair and prompt compensation. The law even provides that any takeover of assets subject to expropriation proceedings would require a court injunction and a guarantee for payment by the authorities.
In practice, over the last two decades the government has carried out asset and company takeovers, expropriations, confiscations, “migrations”, nationalisations, public broadcasting licence terminations and relinquishment without complying with the Constitutional requirements for due process or the payment of fair and prompt compensation.
The means for advancing the same have encompassed the passing of special laws limiting performance of activities to stateowned entities or joint ventures with the state, and that require: handover of assets (e.g. oil and gas and related services) without payment; characterising activities as of public domain or as public services to be carried out exclusively by the state; initiating rigged proceedings for stripping the investor of its rights under licences, concessions or other titles; interim interventions which ultimately become final; tax assessments to reduce or avoid payment of compensation; and use of forceful means.
Different laws for protecting the consumer broadly allow for the takeover and appropriation of inventory or assets of “suspect” companies.
Up to 2014, protection additional to that afforded under BITs and the Constitution was covered in the Law for Promotion and Protection of Investments, which provided rights for equal treatment and afforded protections regarding fair treatment, non-confiscation and non-discrimination, among others, to both foreign and local investors. Its standing had even been confirmed by the Constitutional Chamber of Venezuela Supreme Tribunal of Justice (Feb. 14, 2001, docket 00-1438). The same was replaced by the Foreign Investments Law of 2014 which largely repealed or conditioned said protections; this was in turn replaced by the 2017 Law on Foreign Productive Investments.
7. Government Approvals/Restrictions
7.1 What are the relevant government agencies or departments with authority over projects in the typical project sectors?
Commonly, the competent ministry in charge of the area of the project (for hydrocarbons, this will be the Ministry of Petroleum) will have the authority to regulate and oversee the erection of the project facilities, as well as their operation. Lately, the scope of activities under the oversight of the Ministry of Petroleum and PDVSA has largely expanded, and it can be said that most of the relevant activities/projects are either under their oversight or that of the Ministry for Industries and National Production. In any case, projects are always subject to the authorisation of the Ministry of Ecosocialism (former Ministry of Environment) as the same must first clear all permits associated with environmental impact and land occupancy. Additional authorisations may need to be obtained if the project will be developed in a “security zone” as defined under the Law for Security and Defence.
Additionally, if the bill of a Special Economic Zones Law – already approved in first round of legislative debate in April 2021 – is finally passed by the National Assembly (Congress), further authorisations may be required in the near future if the project or some related activities are to be developed within an area designated as a Special Economic Zone (Zona Económica Especial ).
The bill’s provisions remain far from clear as to authorisations, requirements and regulatory procedures that must be complied with for foreign investors to participate in projects in such zones.
7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?
No, there is no particular requirement, let alone a centralised authority before which financing or project documents (except for investment and technical assistance documents, which must be registered) are to be filed/registered in order to be valid and enforceable. Depending on the nature and structure of the credit and the obligations arising for a government entity participating in the project from the same (e.g. when financing a joint venture in which the government has a majority stake), certain authorisations may need to be pursued and obtained for the financing to be valid and enforceable. Registration of certain loans is required to secure access to currency exchange.
The Law on Foreign Productive Investments of 2017 calls for foreign investments to be registered before the competent authority. In practice, this law has not been applied to date.
7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?
Private lands can be owned and transferred freely to third parties, whether foreign or local. Ownership of private lands will only require consent in the case of areas designated as “security zones”, where consent of the Ministry of Defence would need to be sought. In the case of public lands, the proper concessions, licences, easements or leases would need to be sought on the basis of applicable law.
Natural resources are owned by the Bolivarian Republic of Venezuela. Mineral resources can only be exploited through the granting of a mineral right that allows extraction for a limited term and under certain conditions, but not ownership of the reservoirs or minerals in situ. The right to be afforded varies depending on the minerals to be exploited. In the case of oil reservoirs, the right is granted to a mixed enterprise (an incorporated joint venture where a state-owned entity owns more than a 50% stake is, nowadays, the only vehicle available). In the case of non-associated gas, a licence would allow private-party exploitation and commercialisation.
Ownership of oil and gas pipelines requires a licence or permit and the same is granted for a limited term and results in certain obligations for the carrier, including open access obligations.
Upon termination of the licence (upon expiration or, prior to expiration, for cause), assets pass to the Venezuelan state free of payment and encumbrances.
With regard to mining, a mixed enterprise has also been the vehicle for gold extraction since 2012 and has expanded to other minerals qualified as “strategic” by the National Executive, such as iron, nickel, bauxite, and tantalum, among others. In the case of metals or precious stones other than strategic ones, a concession may still be pursued and obtained.
In terms of other stones, salt mines and pearl fisheries, the rights correspond to the states and are commonly granted through limited-term concessions under state law. Riverbeds, forestries and the like may be exploited through concessions granted by the Federal government.
Last but not least, any extractive project must pursue and obtain environmental permits for construction and operation.
7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources?
Yes, royalties, exploitation taxes and severance taxes are commonly applied in the exploitation of mineral resources. Their basis of computation and rates vary depending on the mineral and applicable law (the highest rate being applicable to oil, which results from the interaction of standard royalties, a severance tax, a “shadow tax” and a windfall contribution, all of them assessed over the value of crude at wellhead, and which can reach beyond 90% of net revenues of the project). In addition, depending on the project, additional taxes may need to be paid, such as export taxes (for oil), shadow taxes (not actually a tax but a profit split, which also applies to oil ventures), and special advantages (which may take the form of an overriding royalty, community contributions, or an additional “tax” on net profits). As mentioned above, a windfall profits tax applicable to oil exports and local sales significantly burdens any transfer of crude oil and products.
With regard to restrictions, there are two that are significant: namely, a restriction on the local transfer and export of crude oil (which must be sold to a PDVSA affiliate); and a restriction on the sale of exploited gold, which must be sold to the Central Bank of Venezuela (BCV). Furthermore, the government may from time to time limit the export of natural gas, hydrocarbon products and petrochemical products in order to cover the needs of the domestic market.
7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange?
After a 15-year strict foreign currency exchange (F/X) control which restricted the ability of investors (foreign and local) to bring in, take out and freely acquire and dispose of foreign currency (as all such transactions had to be carried out through the BCV), a more flexible piece of F/X legislation was introduced in 2018 which encompasses: (i) the new Exchange Agreement N° 1 (CC1) replacing prior Exchange Agreements and providing rules for governing, in a centralised way, all F/X transactions performed in the country, allowing free currency convertibility according to the F/X rates resulting from a “supervised free market”; as well as (ii) the repeal of the F/X infractions and penalties regime formerly under the Law Against F/X Breaches (Ley de Ilícitos Cambiarios).
Nonetheless, the purchase and sale of foreign currencies in the country derived from, and by, the export sector are centralised by the BCV under CC1 provisions, and other market transactions are carried out mostly through authorised operators.
Even though the new F/X regime is more flexible, the current F/X controls also encompass obligations for the sale of proceeds in foreign currency (20%) from the export of goods and services to the BCV, while the 80% allowance is to be used for covering costs and expenses in foreign currency. Certain areas of industry such as hydrocarbons, petrochemicals and mining are allowed to keep foreign currency to pay taxes and obligations denominated in foreign currency. There are no restrictions on agreeing on the payment of obligations in foreign currency for the provision of domestic goods and services.
As recently as February 25, 2022, a special tax on transactions denominated in foreign currency was introduced (to enter into force on March 27, 2022). The same is part of an amendment to the Large Financial Transactions tax (a bank debit tax expanded back in 2015 to transactions outside the banking market). Under this tax, individuals and legal entities will be taxed (the current rate is 3%, but it can ramp up to 8% for transactions through the banking system or 20% for transactions outside the banking system) on payments made in foreign currency or in cryptocurrencies other than that issued by the Bolivarian Republic of Venezuela (PTR), both: (i) within the national system bank, without the intermediation of a foreign bank correspondent; and/or (ii) outside the banking market, provided the payment is made to a Special Taxpayer (Sujeto Pasivo Especial ) as designated by the Tax Authority.
Certain transactions do not trigger the tax (e.g. foreign remittances made through authorised institutions, etc.), while other transactions such as F/X operations made through an official exchange agent or operator benefit from a tax holiday.
7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions?
A new Constitutional Law on Productive Foreign Investments was passed on December 29, 2017 by the Constituent National Assembly. As with its predecessor (the Foreign Investments Law of 2014), the definition of foreign investment covers investments actually made in foreign currency (i.e. through a formal transfer where foreign currency is exchanged for local currency), imported foreign goods/equipment (through customs), and also investments in local currency.
On the downside, while the law does not provide for a cap on remittances (except under certain conditions), it seems to subject repatriation to a two-year investment minimum, and to the prior approval, clearance or certification of payment of taxes and contributions, labour and environmental commitments by the competent authorities. The same clearances would apply to any remittances (i.e., allowing 100% on annual distributable E&P after taxes, after the closing of the first fiscal year, provided the purpose of the investment has been met and verified by the competent authority); to this date, the extent of such limitations remains unclear.
An exceptional cap would apply on remittances in force majeure scenarios (capped at 60–80%) as defined by the National Executive. While the law has not been applied in practice to date, it is important to highlight that for the past seven years, the national government has decreed and extended economic emergency regimes which are likely to fall under the force majeure scenarios provided under the law.
An important feature in the law is recognition of the jurisdiction of local courts for addressing investment issues, which may trump consent to investor-state dispute settlement under BITs, or at least would delay the same until after all local proceedings have been concluded.
There are no restrictions on the use of currency held by project companies, which is not of mandatory sale to the BCV, for remittances, repatriation or fulfilment of their obligations in foreign currency. Indeed, CC1 does not limit the remittance and repatriation of investment returns, as it expressly provides that investors regulated by the Constitutional Law on Productive Foreign Investments may remit proceeds or dividends abroad, as well as repatriate monetary income obtained from its investments, under those terms and conditions provided for in the aforementioned Constitutional Law (i.e., as indicated at the beginning of question 7.6).
At the same time, the obligation to sell 20% of export proceeds to the BCV has been considered to arise only if and when there is availability of said proceeds; as such, it has been construed that when said proceeds are tied to material obligations under financing (i.e. debt accounts under a collateral waterfall only those monies that are ultimately available to the project company, i.e. after payments to financiers, contractors, and even shareholders – as carried out by the trustee or agent – would be the amounts to be sold to the BCV. Such interpretation, while not free from controversy among practitioners, has been consistently applied by companies under project finance structures, with no claim being raised to date.
7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Yes, since 2012 investors have been permitted to keep foreign currency accounts in Venezuelan banks. At the same time, to date there are no restrictions, let alone controls or registration requirements, on companies incorporated or domiciled in Venezuela to hold and manage overseas accounts in foreign currency.
7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad?
There are no particular restrictions for declaring and paying dividends to shareholders under Venezuelan law (net and retained earnings and year-end financials should be approved by a shareholders’ resolution under the Venezuelan generally accepted accounting principles (VEN-NIF)); however, as mentioned above under question 7.6, the government could restrict the remittance of amounts in case of a state of emergency.
Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations?
There is a wide array of laws and regulations relating to health, safety and environment that must be taken into consideration for the erection and operation of project facilities. These are administered by different entities but chiefly by the Ministry of Ecosocialism and its agencies, the Ministry of Labour and its agency (INPSASEL), and the Ministry of Health.
7.10 Is there any specific legal/statutory framework for procurement by project companies?
There are no overall provisions applicable to private companies regarding procurement (local or foreign components), but in certain areas or under the relevant licences (e.g. gas E&P licences) there may be obligations for “national content”, under which preference may need to be afforded to local entities in the provision of certain services and goods (e.g. gas licences).
In the case of state-owned entities, as well as mixed enterprises (where Venezuela or its instrumentalities own more than a 50% stake), the Public Contracting Law requires extensive formalities and a public bidding process (exceptions apply in certain circumstances).
8. Foreign Insurance
8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
Only insurance companies duly authorised by the regulator (Superintendence of the Insurance Activity) can issue insurance policies for projects in Venezuela. Reinsurance by international companies can be underwritten by authorised foreign reinsurers.
It is customary for large projects to include cut-through clauses in insurance arrangements.
8.2 Are insurance policies over project assets payable to foreign (secured) creditors?
Yes. There is no limitation under Venezuelan law for the nomination of foreign creditors as beneficiaries of insurance policies.
9. Foreign Employee Restrictions
9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company?
Foreign workers and employees require a working visa in order to work in Venezuela on a temporary or permanent basis. The labour law provides that a company’s foreign workers/employees are not to exceed 10% of its total workforce. The law and its regulations allow for exceptions under special circumstances that are reviewed by the Ministry of Labour through the Labour Inspector of the circuit where the works will be performed.
Venezuelan labour law provisions and conditions will govern the working relations for services rendered in Venezuela, regardless of whether the employees are foreign or local.
10. Equipment Import Restrictions
10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors?
All imports will be subject to import taxes (currently with a maximum of 30%), customs duties (capped at 3%) and value added tax (VAT) (currently at 16%); certain reductions may apply for plant and equipment on import taxes if a single customs qualification (CAU) is applied for. Equipment entered on a temporary basis, e.g. for construction, can be exempted from taxes, provided the same is re-exported within the time frame provided under customs law. At the same time, the government may grant certain tax holidays on the import of project equipment.
10.2 If so, what import duties are payable and are exceptions available?
With the exception of certain materials which require particular permits or licences, equipment may be freely imported into Venezuela by contractors. In certain areas (e.g. oil and gas), local content provisions apply in order to maximise their use.
11. Force Majeure
11.1 Are force majeure exclusions available and enforceable?
Venezuelan law expressly recognises force majeure, and the exclusions resulting therefrom are enforceable under general contracting law.
12. Corrupt Practices
12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?
Yes, there are general rules prohibiting corrupt business practices and bribery, in particular in dealings with the Venezuelan government, its instrumentalities and Venezuela’s public services. Many of the rules are aimed at public servants and employees of government instrumentalities, and the same apply to mixed enterprises where private investors have a minority stake. Penalties range from fines, to a suspension of activities with governmental entities, to imprisonment.
13. Applicable Law
13.1 What law typically governs project agreements?
Project agreements are typically governed by the laws of Venezuela.
13.2 What law typically governs financing agreements?
Financing agreements involving overseas entities are typically governed by foreign law, while similar agreements with local entities are commonly governed by Venezuelan law.
13.3 What matters are typically governed by domestic law?
Security agreements over movable or immovable property located in Venezuela are commonly subject to domestic law. In fact, mortgages, as well as pledges without transfer of possession, are mandatorily subject to Venezuelan law. Certain transactions and relations, e.g. labour, may be agreed under foreign law, but Venezuelan public policy provisions override any inconsistent agreement or rule.
14. Jurisdiction and Waiver of Immunity
14.1 Is a party’s submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable?
Submission to foreign jurisdiction by private parties is binding and enforceable (except for certain limitations, as is the case for immovable property). To be enforceable in Venezuela, judgments by foreign courts must obtain an exequatur from the Supreme Tribunal of Justice of Venezuela.
Venezuelan instrumentalities may waive their immunity provided proper consents have been obtained, but certain privileges cannot be waived. As of January 2015, the Attorney General’s Office confirmed in a ruling the relative status of immunity of jurisdiction for Venezuela and its instrumentalities under the Constitution, in the case of public credit transactions (loans).
15. International Arbitration
15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts?
Yes, they are. In the case of private parties, no additional formalities are required; but in the case of state-owned entities, prior consent must be obtained from the relevant ministry for the provision to be valid and binding.
15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions?
Yes, Venezuela is a party to the New York Convention. The same applies to commercial disputes, whether arising from contract or otherwise, and allows for the recognition of awards made in the territory of another contracting state.
15.3 Are any types of disputes not arbitrable under local law?
Among private parties, only disputes related to legal standing and capacity of persons, family (such as divorce, recognition of heirs, or succession), criminal matters or public policy (orden público) cannot be submitted to arbitration.
In addition to prior authorisation for submission to arbitration, state instrumentalities cannot arbitrate on public policy or issues related to the exercise of sovereign powers and attributions.
15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings?
There are none in general, although in some regulated areas, disputes may be directed to arbitration; for example, in the case of publicly held companies, a dispute raised by minority shareholders may be subject to domestic ad hoc arbitration sponsored by the competent authority.
16. Change of Law / Political Risk
16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees?
The BITs in place (of which there are 26) grant investment protection under their terms. While Venezuela is no longer part of ICSID after its withdrawal in early 2012, most BITs still allow access to institutional arbitration by means of ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL) rules or another alternative.
To date, Venezuela remains a party to the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, as well as to regional development agencies.
17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?
Interest payable on loans granted by local lenders is not subject to withholding tax (WHT), but a lender is subject to the standard corporate tax rate (with a maximum nominal rate of 34%).
Interest payable on loans by foreign lenders is subject to full WHT under domestic law; said WHT is largely reduced or eliminated under the tax treaties in place (of which there are 31).
If a foreign lender is a financial institution, the WHT rate under domestic law is 4.95%. For other foreign lenders, WHT will be at the corporate tax rate (with a maximum nominal rate of 34%). Similar rules apply to interest on securities issued in Venezuela or overseas (except for American depositary receipts (ADRs) and global depositary receipts (GDRs), which would not be taxable for non-residents). It is common to include gross-up or pay-on-behalf provisions in cross-border finance arrangements.
17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors?
What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?
Under the Venezuelan Constitution, foreign investors or creditors cannot be granted preferential treatment over local investors.
In any case, BITs, tax treaties and advantages under certain bilateral or multilateral co-operation agreements are valid and binding under Venezuelan law and are recognised by the Supreme Tribunal of Justice.
18. Other Matters
18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?
No, there are not.
18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market instruments.
There are no legal impositions for issuing bonds or other capital market instruments overseas (i.e. in foreign markets). The size of the local market, and the fact that the same is mostly a market in local currency, among others, make it an unworkable alternative.
19. Islamic Finance
19.1 Explain how Istina’a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Islamic project financing in your jurisdiction.
To our understanding, since they are uncommon in Venezuela, the basic principle of Islamic financial instruments relates to risk-sharing (trading-like transactions) rather than the risktransfer common in traditional banking. Under Venezuelan law, transactions can be easily adapted on the basis of the principle of contractual freedom (with the exception of banks and other financial institutions subject to special regulatory regimes), to concepts such as: profit-sharing (Mudarabah); joint venture (Musharakah); manufacturing financing (Istina’a); cost-plus – as a proxy to a mortgage transaction – (Murabaha); and leasing (Ijarah), which are all common in Islamic financing, as well as to the granting of powers of attorney (Wakala) provided that, as a result of the relevant transaction, one of the parties is exempted from bearing any losses or receiving all benefits.
19.2 In what circumstances may Shari’ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector?
Shari’ah law may become the governing law of a contract or dispute based on the principle of contractual freedom, i.e. whenever the parties to the transaction choose the same as the governing law of the contract or the law governing a dispute, and provided the same does not conflict with a public policy provision as may apply to the particular case. To the best of our knowledge, there are no recent or notable historical cases on jurisdictional issues related to the applicability of Shari’ah or the conflict of Shari’ah and local law relevant to the finance sector.
19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?
The inclusion of an interest payment obligation in a loan agreement or any other credit facility is of the essence of loan and credit transactions, both under general commercial law and in accordance with banking regulations. The charging of interest as well as the provision of other fees and charges does not run against local law. Nonetheless, foreign lenders must bear in mind that under domestic law there may be some limitations as to the amount of interest charged, and that for interest to be capitalised, a particular amendment (or novation) of the loan agreement must take place.
Writers: Juan Carlos Garantón-Blanco and José Antonio De Sousa Cumbrado, Torres, Plaz & Araujo