1 Give an overview of the country’s economy, its structure and main characteristics, and prevailing government economic policy, particularly as regards foreign investment.
Venezuela’s revenue comes mainly from oil exports; therefore, owing to the reduction of oil prices, the Venezuelan economy has been dramatically affected. During 2014, 2015, 2016, 2017 and 2018 the macro-economic numbers for Venezuela have substantially deteriorated, and inflation and devaluation are reaching historically high proportions. Though no official figures are available for 2019, some economists are predicting 2000 per cent for 2019.
Several multinational companies have either reduced their operations in, or totally abandoned, the country.
The government has imposed multiple controls on prices, investments, foreign exchange, and the repatriation of capital and dividends, and the government’s policy is to issue measures such price fixing and the regulation of profits in the hope of controlling the economy.
2 Describe the legal framework and legal culture in your jurisdiction as regards business and commerce.
The Venezuelan legal system is a codified system based on civil law. In accordance with the Constitution, the law-making process is granted to the National Assembly, elected by popular vote. However, special powers introduced through multiple enabling laws have been granted to the President in recent years, and most laws enacted in the past 10 to 15 years have been made through decrees issued by the President based on the enabling laws. Under the Constitution, the National Power is divided into five separate powers:
- the Executive Power;
- the Legislative Power;
- the Judicial Power;
- the Electoral Power; and
- the Citizens Power.
Multiple laws have been enacted in recent years have not been well received by business. In particular, the government has for many years:
- imposed an absolute prohibition on dismissing employees;
- imposed regulations that force companies to disclose their cost structure;
- limited earnings to certain amounts; and
- imposed formulae for the calculation of the cost base.
Companies are also obligated to sell at fixed prices, and to direct part of their production to government buyers. Therefore, the government has a substantial presence in companies’ economic activity and control.
3 What are the main sources of civil and administrative law applicable to companies?
For years, the main body of law applicable to companies comprised the Civil Code and Commerce Code, which regulate most private matters, and the various laws issued by the Legislative Power. In particular, the Commerce Code regulates all matters applicable to corporate incorporation, corporate governance, and corporate existence and commercial matters. In recent years, new laws and regulations have evolved that both regulate and constrict the activities of companies. Noteworthy among those regulations are the Labour Law (Organic Law for Male and Female Workers), which regulates all matters related to employment, severance payments, salaries, working hours, etc. Another set of rules is related to the fixing of prices and commercialisation conditions, the Law on Cost and Fair Prices, which sets out how cost is determined and the maximum prices at which products can be sold.
The government has many administrative agencies in charge of reviewing and implementing many of its controls, and that issue different regulations that apply to companies. These include Seniat, which is in charge of collecting taxes; the National Superintendency for the Defence of Social-Economic Rights (Sundde), which is in charge of setting and reviewing the price of products and enforcing the economic rights of consumers; and the National Centre for Foreign Trade (CENCOEX), which is in charge of foreign exchange and investments.
4 How does the court system operate with regards to large commercial disputes?
The court system in Venezuela is cumbersome, and a large commercial dispute will usually take in excess of five years to be concluded. Such commercial case will typically be tried, appealed, go to review by the Supreme Court, and very often revised by the trial judge after the Supreme Court has annulled a part of the trial or appeals court decision. Therefore, several decisions will be issued before the case is finally decided.
5 What legal recourse do consumers typically have against businesses?
The most common and effective recourse consumers have against businesses is to file a claim before Sundde. Sundde is an administrative entity overseen by the government’s Economic Vice President, and has authority to ensure compliance with the laws regarding prices, offers, marketing, warranties and other economic rights of consumers.
Sundde has become an effective tool for customers and associations of consumers trying to enforce their rights. Sundde has been aggressive in its dealings with businesses, having on many occasions imposed sanctions that have ranged from expropriations, temporal and permanent closure of businesses, incarcerations of parties and intervention in businesses – in some cases before a final decision has been made.
Class actions and litigations between consumers and business are not common in Venezuela, because access to the court system is in general somewhat limited due to the expenses associated with such actions and litigation, and the length of time that a trial will take.
6 How significant is arbitration as a method of dispute resolution?
Arbitration as a source of dispute resolution is fairly common. Due to the fact that a trial in a civil or a commercial court will typically last several years, and that confidence in the court system is somewhat low, contracts between private parties will very often contain arbitration clauses. Notwithstanding the forgoing, adhesion contracts may not contain arbitration clauses, and disagreements resulting from any such contract may only be submitted to arbitration in an express manner after a dispute has occurred.
7 What other methods of dispute resolution are commonly used?
Contracts will typically contain a clause whereby the parties agree to try to settle differences through the direct negotiation between the authorities and the parties. If an agreement is reached within a predefined period of time (usually 30 days), the matter may be submitted to arbitration. Mediation is not so frequently used as a method for solving disputes.
8 How easy is it to have foreign court judgments and foreign arbitral awards recognised and enforced in your jurisdiction?
In general, and with certain exceptions (such as issues regarding real estate, and other matters in which jurisdiction may not be waived), foreign judgements and arbitral awards are enforceable in Venezuela. The conditions for the enforceability of a decision vary depending on whether it is a decision rendered by a foreign court or whether it is an arbitral award.
To enforce a judgment issued by a foreign court, it is necessary to obtain an exequatur from the Supreme Court of Justice.
Venezuela is a party to the New York Convention; however, Venezuela will only apply the Convention for the recognition and enforcement of awards made in the territory of another contracting state; and in the case of differences arising out of legal relationships, whether contractual or not, that are considered commercial under national law.
Foreign investment and trade
9 Outline any relevant treaty organisations, economic or monetary unions, or free trade agreements.
Venezuela is party to several treaty organisations, including Mercosur (South America’s leading trading bloc, together with Argentina, Brazil, Paraguay and Uruguay). Venezuela is also a member the Bolivarian Alliance of the Peoples of Our America (ALBA), together with another 11 countries (Antigua and Barbuda, Bolivia, Cuba, Dominica, Ecuador, Grenada, Nicaragua, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines). Venezuela is also part of the Organization of American States and the World Trade Organization, and also participates as an observer state in the Caribbean Community. Venezuela is also a member of the World Bank and the Inter-American Development Bank.
Venezuela is party to several bilateral investment treaties, and was a member of the ICSID Convention (although this last was repealed, effective from June 2012).
Venezuela has ratified more than 30 agreements to avoid double taxation (with Germany, Austria, Barbados, Belarus, Belgium, Brasil, Canada, China, South Korea, Cuba, Denmark, Emirates Arabs United, Spain, United States of America, France, Indonesia, Iran, Italy, Kuwait, Malaysia, Norway, Netherland, Portugal, Qatar, the United Kingdom, the Czech Republic, Russia, Sweden, Switzerland, Trinidad and Tobago, and Vietnam)
Regarding treaties to promote and protect foreign investments, Venezuelan has agreements with the following countries: Argentina, Barbados, Belgium–Luxemburg, Brazil, Canada, the Czech Republic, Costa Rica, Denmark, Ecuador, Spain, France, the Netherlands, Paraguay, Peru, Portugal, Sweden, Switzerland, the United Kingdom and Uruguay.
The regime for the regulation of foreign investment in Venezuela is provided for in different laws, the Constitution, several treaties to promote and protect foreign investments and the Law for Foreign Investments, as well as other domestic regulations.
10 Are foreign exchange or currency controls in place?
In February 2003, the Venezuelan government enacted a rigorous foreign exchange control regime that in general restricts the ability of particulars to freely acquire, keep and dispose of foreign currency.
The general principle is that Venezuelan bolivars may not be freely converted into foreign currency unless such an exchange is made through the mechanism officially approved by the government, called the Foreign Exchange System.
The Money Market System is a system that operates in an organised and transparent manner, without the participants knowing the quotes of supply and demand during the process of trading and crossing transactions, identification which, together with the identification of the counterparty, is known after the end of the process, for the purposes of the settlement of the agreed transactions.
The exchange rate fluctuates freely according to the supply and demand of individuals or corporations. The Venezuelan Central Bank will publish on its website the average exchange rate of the transactions traded in the Foreign Exchange. The purchase and sale of foreign currency made by individuals or private corporations will be carried out through authorised exchange operators and through the Exchange Market System, under the regulation and administration of the Venezuelan Central Bank. Individuals and corporations file their requirement for the sale or purchase of foreign currency before the authorised exchange operators.
The foreign currency bought through the above-mentioned system will be deposited in accounts opened in the national financial system. The daily official exchange rate is published in the Venezuelan Central Bank webpage (www.bcv.org.ve).
There is no restriction as to the amount of currency that enters the country. Individuals and corporations dedicated to the export of goods and services can freely retain and manage up to 80 per cent of the income they receive in foreign currency to pay expenses and any other expenditure they should make regarding their activities. The rest of the foreign currency will be sold to the Central Bank of Venezuela at the official exchange rate.
Exporters are also allowed to keep foreign bank accounts.
Foreign exchange regulations have special provisions in respect of Venezuela's state-controlled oil company, Petróleos de Venezuela, SA (PDVSA), its affiliates and mixed companies (ie, entities incorporated by a state-owned company and a private company) engaged in the export of liquid and gas hydrocarbons, as well as of exporters. Under such regulations, these entities are allowed to:
- maintain offshore accounts;
- keep in foreign currency the proceeds arising out of export activities up to an amount to be determined under the favourable opinion of the Venezuelan Central Bank;
- use the funds in their offshore accounts to pay their obligations in foreign currency; and
- obtain from the Venezuelan Central Bank foreign currency to replenish the funds used in payment of their foreign currency obligations.
The foreign currency received by PDVSA, its affiliates and mixed companies engaged in the oil and gas sector need to be sold to the Venezuelan Central Bank at one of the above-mentioned official exchange rates, as determined from time to time by the Venezuelan Central Bank, the Ministry for the Popular Power for Banking and Finance, and the Vice Presidency of Economic Affairs.
11 Are there restrictions on foreign investment?
Venezuelan law treats foreign and national investors alike, although some benefits are provided for national investors. Several sectors are completely reserved for national investors, such as television stations, newspapers and radio stations, and areas where private participation is limited, such as the upstream oil sector, where private participation is permitted only in association with state-owned companies and where such state-owned companies will hold more than 50 per cent. In addition, in other areas such as gas and petrochemicals, while such restriction is not actually legally present, the government in practice has imposed the same restriction.
Foreign investments are required to be registered before CENCOEX, or before the Ministry of the Popular Power for Petroleum and Mining or the Banking and Insurance Superintendency (depending on the sector of investment).
Private companies with foreign ownership may purchase real estate in Venezuela provided that such real estate is not located in areas that have been designated as ‘safety zones’. The National Security Organic Law and the regulations thereunder provide that the acquisition, possession, title and other rights over real property located in safety zones by foreign persons must be authorised by the Ministry of the Popular Power for Defence.
All foreign investments must be registered before the National Centre for Foreign Trade (CENCOEX www.cencoex.gob.ve), and remain in the country for at least five years in order to benefits from the privileges set forth in the Law on Foreign Investment. One million US dollars is the minimum amount to be registered before CENCOEX. CENCOEX may set forth different minimum amounts for specific sectors of the economy. Foreign investors will be entitled to repatriate up to 80 per cent of the dividends and the 85 per cent of capital invested in Venezuela. The Venezuelan Executive Power may limit the repatriations of dividends and capital at any time when extraordinary economics circumstances occur in the country that can affect the country's capacity of payment or the international reserves.
12 Are there grants, incentives or tax reliefs for foreign investors or businesses?
Capital investments made in Venezuelan corporations, either by foreign nationals or local investors, are subject to a 2 per cent registration stamp tax. In the absence of tax treaties, interest payments made to offshore non-financial institutions are subject to 34 per cent withholding tax, payable through withholding. Interest payments made to offshore financial institutions not domiciled in Venezuela are subject to 4.95 per cent tax payable through withholding. The filing and registration of mortgages and other securities are subject, in most cases, to a 0.25 per cent registration fee calculated over the secured amount.
The Income Tax Law contains provisions that allow for the granting of special tax incentives, such as partial or total tax exemptions. Such exemptions can be granted on a general basis (for projects in a specific area or economic sector) and not on a particular basis, and have to be granted for a specific term.
13 What are the main taxes that apply to cross-border or foreign-owned business and investors?
The main taxes in Venezuela are:
- income tax;
- value added tax;
- municipal taxes; and
- several parafiscal contributions set forth in different laws, such as the Organic Law on Science, Technology and Innovation; contributions to the programme for integral and social prevention against drug traffic and consumption; contributions to the National Socialist Institute for Educational Cooperation; contributions to the Venezuelan Institute of Social Security; contributions to the housing policy subsystem; contributions to the unemployment benefit system; and contributions under the Organic Law on Prevention, Conditions and Environment at Work.
It should be noted that the different parafiscal contributions paid by business in Venezuela, are usually calculated on gross income, and constitute a very important part of the tax contribution, and care should be taken to ensure they are included in economic models.
The exploration and exploitation of oil, gas and other natural resources are subject to royalties and additional taxes.
Venezuelan tax laws and regulations will apply to trading activities performed within Venezuela or in respect of income arising from dealing with Venezuelan assets.
The Venezuela Income Tax Law allows Venezuela to tax the income of Venezuelan individuals and legal entities as well as foreign individuals and legal entities with a permanent establishment in the country.
Additionally, in accordance with the Income Tax Law, foreign individuals or entities that are not resident or are not domiciled in Venezuela will also be subject to pay income tax, as long as the cause or the source of the taxable income occurs or is located within the Venezuelan territory, even if they do not have a permanent establishment or fixed place of business in the country.
Foreign investors will be subject to the same taxes applicable to local investors, and may be entitled to the same available benefits. The corporate tax rate for foreign investors domiciled in Venezuela, or with permanent establishments therein, is 34 per cent (progressive with minimal escalation). Tax rates and withholdings for foreign investors not domiciled in Venezuela are usually higher and vary.
14 Which industry sectors are regulated or controlled by the government?
Today, almost all sectors of the economy are highly regulated by the government. The fact that there are several bodies of law that restrict foreign exchange, costs, prices, commercialisation, and imports and exports, imply that the government has a firm grip on the economic sector and exercises constant controls over all types of entities.
In addition, multiple areas of the economy are reserved to the state, or have been expropriated by the government, and the government exercises complete control over such sectors, such as oil, cement, iron, aluminium, gold, mining, electricals, telecommunications, ports and airports.
The Venezuelan hydrocarbons industry is highly regulated, and is dominated PDVSA and its subsidiaries. PDVSA acts as a holding company. Its subsidiaries are engaged in the exploration, production and commercialisation of oil and oil derivatives products.
15 Who are the key industry regulators, and what are their powers?
In Venezuela, depending on the economic or commercial sector, there is usually a regulatory entity, with rules that are mainly set out in the law that regulates that particular sector. Several sectors are regulated by different entities, as is the case for those involved in the manufacturing and commercialisation of food and basic supplies. One of the most important concerns of businesses is the high amount of resources that must be committed to comply with multiple regulations and different supervising entities.
At the time of writing, one of the entities exercising most control over manufacturing and commercialisation entities is SUNDEE, which approves commercialisation prices and the formulae to calculate costs and sale prices, and oversees all activities of companies. SUNDEE continuously performs inspections, and has, inter alia, closed businesses and carried out seizures.
16 What are the other main enforcement authorities relevant to businesses?
A variety of Venezuelan authorities monitor, supervise and enforce laws regarding different businesses. The authorities, including the tax, environmental, anticorruption, foreign investment and competition authorities, act under specific laws that grant them the power to monitor, supervise and sanction illegal activities. Sundde has gained in importance during the past few years, and is, as previously mentioned, authorised to ensure compliance with the laws regarding prices, offers, marketing, warranties and other economic rights of consumers.
17 On which areas have regulators particularly focused their recent enforcement activities?
As previously indicated, the area that in the past few years has suffered from the most control and intervention by the government is the manufacturing and commercialisation of raw materials, food and basic products, which are strictly controlled throughout the production and commercialisation chain. The sale of some products is limited in terms of quantity. In addition, the government has imposed controls and prices on sectors, including appliances, and has forced businesses to sell their entire inventories at fixed prices, some times below cost, which resulted in the entire sale of complete inventories in a matter of days.
18 What are the principal bribery, corruption and money laundering concerns for businesses?
The two main statutes regarding the treatment of corruption in Venezuela are the Anti-Corruption Law, whose main purposes is to set forth principles that shall protect public resources from mismanagement and corruption; and the Inter-American Convention Against Corruption, which aims to reduce corruption, and to establish cooperation among states to prevent and punish corruption. In addition, several special laws contain anticorruption provisions.
The Venezuelan Anti-Corruption Law does not contain a simple definition of a ‘bribe’. Rather, it has defined as acts punishable with administrative sanctions, fines or jail many conducts that may or may not have a direct effect on public resources. The first category is the sudden increase of patrimony, or ‘illicit richness’. The Law provides that public officials that without any justification increase their patrimony in a manner that those not maintain a relation with their income may be subject to penalties and the assets subject to seizure. The Law also makes punishable, inter alia, the following:
- the appropriation of public assets;
- negligence in the handling of assets that may cause their loss or deterioration;
- the use of assets for ends different than those for which they have been assigned;
- the use of budgeted funds for matters different than those they were approved for;
- avoiding the application of bidding processes;
- the assumption of debts without the proper approvals;
- expending in excess of approved budgets;
- requests by public officers for promises or benefits for third parties in exchange for public favours;
- delays in rendering decisions on delivering documents to obtain undue benefits;
- payment, or the request of payment, of money or benefits in exchange for acts or omissions;
- the use of public information for undue benefits; and
- the disclosure of public information to benefit oneself or a third party.
In addition, the Superintendency of Institutions of the Banking Sector has broad powers to issue rules and investigate money-laundering activities. In such regard, the Superintendency has issued the ‘Rules Regarding the Management and Fiscalisation of Risks Related to the Felonies of Legitimation of Capitals and Financing of Terrorism applicable to Banks and other Financial institutions’. Under such regulation, entities regulated by the Law of Institutions of the Banking Sector must have in place an integral system for the management of risks of money laundering and financing of terrorism. Under such system, entities must report any suspicious activity of their clients. In addition, such rules impose important know your customer obligations on the regulated entities.
19 What are the main data protection and privacy risks for businesses?
The main regulation regarding personal information in Venezuela is article 28 of the National Constitution of 1999, which provides that:
Every person has the right of accessing the information and data referred to himself or his assets and goods compiled or recorded by any public or private registry, with the exemptions established by law, as well as to know the usage for such information and data and its objective, and to ask the authorised court for the updating, amendment or destruction of such information and data if they were erroneous or if they illegitimately affect his rights. In the same manner, every person will have the right to access documents of any nature containing relevant information for any community or group of persons.
Similarly, article 20 of the Special Law Against Data Processing Felonies provides that:
He who by any means takes, uses, modifies or suppresses, without the consent of its owner, data or personal information of another person or to that which such person should have a legitimate interest on, which is incorporated to a computer or system using information technology, shall be punished with imprisonment from two to six years and a fine of two to six hundred tax units.
As a consequence of these rules, companies must protect by any means necessary the personal information provided by employees since they will be considered the guardians of such information. On the other hand, since employers will have access to the information, any violation of employees’ rights concerning such information by any company within the employer’s group may result in the responsibility of the employer for any damage caused and for any criminal consequence.
20 What are the main anti-fraud and financial statements duties?
The most important duty regarding financial statements is contained in the Commercial Code, which provides that the financial statements of a company must be approved every year by the shareholders’ meeting. The financial statements so approved are filed in the commercial registry and may be publicly accessed by any person that reviews the files of the company in the commercial registry. The managers or directors of the company must sign such financial statements, and third parties may rely on them.
The most important anti-fraud provisions are contained in the Civil and Criminal Codes, which provide a broad range of legal actions to defend against fraudulent actions of any person in Venezuela.
21 What are the main competition rules companies must comply with?
Competition in Venezuela is mainly regulated by the Antimonopoly Law, which was published in Official Gazette No. 40.549 on 26 November 2014. The agency in charge of supervising competition matters is the Antimonopoly Superintendency, which has broad investigative and supervisory powers in antitrust matters.
In general, activities that limit free competition, such as the establishment of monopolies, fixing of prices, abuses of dominant position and any form of arrangement that may threaten free competition, are forbidden.
Regarding filing requirements in merger and acquisition transactions, under Venezuelan law, filing is not mandatory from an antitrust perspective law for mergers and acquisitions, except in telecommunication transactions. However, parties that have doubts in connection with a specific transaction or that have determined that prohibited situations will occur due to a transaction may apply for a preliminary authorisation from the Antimonopoly Superintendency. In this proceeding, the Antimonopoly Superintendency could authorise the transaction if the legal requirements set forth in the Law and its regulations have been complied with.
22 Outline the corporate governance regime.
Venezuelan law provides great flexibility in that, subject to certain restrictions, in general it allows a corporation to set up a management and corporate governance scheme that it sees most fit to its particular needs or circumstances. The articles of incorporation of a corporation shall establish the company’s governance scheme; however, the law provides that a corporation must have two separate entities: the shareholders’ meeting and the managers.
The shareholders’ meeting has the broadest powers, and must approve many of the most important decisions regarding matters such as mergers, changes in the articles of incorporation, capitalisations, reductions of capital and early liquidation. The shareholders’ meeting also appoints the managers of the corporation.
The managers (who may be called directors, administrators or by any other designation as provided for in the articles of incorporation) shall manage the company’s day-to-day operations. The articles of incorporation may provide that a company shall be managed by one or more managers, who will act singly or jointly, or establish a collegiate body such as a board of directors and establish the rules under which such body will deliberate. The articles of incorporation shall also establish if the company will have any officers and their duties and authority, and determine who will appoint and remove such officers.
The annual ordinary shareholders’ meeting shall approve the financial statements of the company, and will normally appoint, ratify or remove managers.
23 Can business entities incur criminal liability? What are the sanctions for businesses, related companies and their directors and officers for wrongdoing and compliance breaches?
As a general principle, criminal liability is imposed on individuals, requiring the commission by such individual of a felony typified as such in the legal system. However, some laws in certain matters, such as environmental and labour issues, have established that if a company performs a felony, the officers or directors that had direct knowledge of such wrongdoing may be held criminally liable for such wrongdoing.
Companies may also be subject to monetary fines for criminal behaviour committed under several laws, including labour and environmental laws.
24 What types of business entity are most commonly used by foreign investors and why? What are the main requirements for their establishment and operation?
The sociedad anónima (SA) (also indistinctively referred to as campania anonima (CA)) is by far the most commonly used and accepted legal entity by local businesses, creditors and investors. The basic characteristic of such corporate scheme is that the company has a determined capital, which is represented by shares, and that the liability of the shareholders will be limited to the contribution made pursuant to their subscribed capital in the company. Consequently, as a general principle, the shareholders would be isolated from the liability of the company.
The Code of Commerce does not contemplate any minimum or maximum capital for an SA, and the amount to be allocated as capital of the SA is decided by the shareholders. However, the Law for Public Registries and Notarisation has granted commercial registrars with the authority to deny the registration of companies with ‘insufficient capital’ taking into consideration their purpose. Therefore, the commercial registries have established a table with the minimum capitals that companies shall have, which minimum varies depending on the purpose of the company. The capital can be paid in cash or in kind, as decided by the shareholders, and it must to be paid up in at least 20 per cent of the total subscribed capital.
The capital can be increased by the shareholders at any time in different manners, such as a transfer of funds to Venezuela, the contribution of assets or the capitalisation of credits.
The following steps must be taken to complete the incorporation of a SA.
Name of the company
A name must be chosen and, if available, reserved before the commercial registry. The name chosen and reserved must be indicated in the company’s articles of incorporation and by-laws. This step usually takes three business days.
Articles of incorporation and by-laws
These must be submitted the before the mercantile registry for filing. Such document must contain, as a minimum, the following:
- name and legal domicile of the company;
- purpose of the company;
- term of the company, which may not be indefinite;
- the company’s capital to be subscribed and the amount that will be effectively paid. At least 20 per cent of the subscribed capital shall be paid. There will be a 1 per cent stamp tax calculated over the total subscribed capital;
- full identification of the shareholders (two as a minimum) and the shares to be owned by each. Shareholders can be individuals or legal entities. If they are individuals, their Venezuelan identity card (or passport, if foreigners) must be detailed and copies presented. If legal entities, specifications of their incorporation documents are required, which shall be presented duly notarised and legalised (either through apostille, if of a country that is a member of the Hague Convention, or before the Venezuelan consulate in the country of origin if the country is not a member of the Hague Convention); any documents that are not in Spanish shall be translated into Spanish by a public interpreter;
- the rules applicable to shareholders’ meetings, with a specification of the scope of the powers that such body shall have, minimum quorum requirements, any applicable voting requirements, decisions regarding special majorities or any other relevant issue;
- rules regarding the administration or management of the company, including a description of the responsibilities and authorities of the different bodies or officers and the manner in which such authority shall be exercised;
- fiscal period of the company;
- the principles to be followed for the preparation of financial statements and the distribution of profits;
- identification of the administrators, directors, managers or officers that compose the management of the company. The administrators or managers may be Venezuelan or foreign individuals; however, commercial registries have recently begun to require certain minimum representation in the management or legal representation by Venezuelan individuals; and
- identification of the company’s statutory auditor.
Power of attorney
To incorporate am SA, foreign shareholders should grant a power of attorney to the person who will execute the articles of incorporation and other documents incidental to the registration on his or her behalf. Such power of attorney shall be duly notarised and legalised (either through apostille, if in a country that is a member of the Hague Convention, or before the Venezuelan consulate in the country of origin if the country is not a member of the Hague Convention). If not in Spanish, the power of attorney shall be translated into Spanish by a public interpreter.
Payment of capital
In addition, to complete the registration, documentation supporting the payment of the capital shall be filed. If the capital is paid in cash, then a deposit voucher and a certification from the bank attesting the deposit of the funds shall be filed. If the capital is paid in kind, then an inventory certified by a certified public accountant describing the assets and their value shall be filed.
25 Describe the M&A market and the merger control regime. How easy is it to complete deals in your jurisdiction?
As a consequence of the current complex situation in Venezuela, many companies have decided to downsize their operations and structures by merging their operations and different vehicles into one single entity that operates in the country. The process to complete a merger will typically take approximately six months to complete.
The decision to merge two companies shall be adopted by the shareholders’ meeting of both the entities to be merged. The companies to be merged shall enter into a ‘merger agreement’, which shall be executed by authorised representatives of both parties. The merger agreement must set forth the terms and conditions of the merger, such as specifications about which entity shall survive and which entity will cease to exist, and any other matter that may be relevant. The merger agreement must be notarised (based on article 23 of Resolution No. 19 of the Ministry of Interior, Justice and Peace, dated 13 January 2014). Financial statements of both companies dated on the date of the merger shall be prepared and presented to the commercial registry together with the notarised merger agreement and the shareholders’ meetings of both companies approving the merger.
Registration processes before the commercial registries are often delayed for many reasons, including the fact that commercial registries often request changes to be made to the documentation that has been presented, to the form in which documents are presented or in the supporting documents that shall be filed. These requirements change from one commercial registry to another.
Once the shareholders’ meetings’ minutes are registered in the commercial registry or registries, the merger agreement shall be published in an authorised legal publication. In practice, the shareholders’ meetings approving the merger are also published.
The merger will not be effective until a three-month period, to be counted from the date on which the publication previously indicated, has occurred. The Commercial Code establishes that a merger may be closed before such period if the payment of company debts, or the approval of all creditors, is also evidenced. During this three-month period, creditors may oppose the merger; if this occurs, it will suspend the merger until the suspension is lifted through a definitive judicial decision.
Once the three-month period elapses without any opposition from the creditors of the merging companies, the merger may become effective, and the surviving company shall assume all rights and liabilities of the company that ceases to exist. In such manner, most practitioners and authors assume the position that the surviving company is the universal successor of the company that ceases to exist.
Once the merger becomes effective, many notices to all kinds of governmental entities shall be made. In such regard, the tax administration shall be notified of the merger within one month from the date that the merger became effective. An income tax return shall also be filed for the ‘short’ fiscal period of the entity that is extinguished and that ends on the date the entity ceased to exist. In addition, all governmental entities in which the company that ceases to exist is registered (such as the social security administration, apprenticeship programmes, housing and other parafiscal entities) shall be notified of the merger so that their records may be properly updated to reflect the surviving entity as successor of the entity that ceases to exist.
26 Outline the corporate insolvency regime. Is bankruptcy protection available for corporates?
The Commercial Code establishes two different proceedings to deal with companies that cease to pay their obligations as they become due. The first, the atraso, is applicable when a company has liquidity (cash flow) problems but its assets are still greater in value than its liabilities. The second procedure is bankruptcy. Bankruptcy proceedings will be applicable when a company ceases to pay it debts as they become due, and the company’s liabilities are higher in value than its assets.
The judicial process of bankruptcy may be initiated by the bankrupt company, or by the bankrupt’s creditors acting jointly or separately. In such regard, article 915 of the Commercial Code sets forth the obligation of the businessperson (or company) to declare his or her state of bankruptcy before a court within the three days after his or her cessation of payments. The request shall be accompanied by a balance sheet of the company listing all goods and real estate, incomes and losses (during the past 10 years), and a statement explaining the circumstances and facts of the cessation of payments. The creditors, acting jointly or separately, may also bring forth a bankruptcy petition. In the case of a ‘cessation of payments’ by a debtor, the creditors are not required to wait until their credits become due, since the main reason for this action is to avoid the loss of all of the debtor’s assets with the result of leaving the creditors in a weaker position to collect amounts due to them.
In both cases, the petition shall be filed before the appropriate first instance court (that of the domicile of the debtor). Once the claim is admitted by the court, the debtor is called, and he or she is to answer the claim.
In general terms, the bankruptcy proceeding is as follows:
After the filing of the bankruptcy proceeding, the following issues shall be proved:
- the fact of being a merchant (which shall be presumed in the case of companies);
- the cessation of payments;
- the legal or mercantile character of the debts; and
- the condition of the creditors.
When the claim is presented by the debtor, he or she has the burden of proof; when it is presented by the creditors, they have the burden of proof. The court shall analyse the above-mentioned issues, and shall pronounce a decision on whether the company is in fact bankrupt.
If the court declares the bankruptcy, the debtor’s equity is to be liquidated. The decision shall contain:
- the appointment of one or more trustees, who must be lawyers or businesspeople, with no relationship with the bankrupt company, and they shall be in charge of the administration and liquidation of its equity;
- an order to perform a judicial occupation of the debtor’s goods;
- an order to forward all correspondence of the debtor to the trustee;
- a prohibition to pay or deliver goods to the debtor;
- an order to call the bankrupt’s current creditors for the first general creditors’ meeting, to be held within 15 days following the decree, asking them to bring forth their titles to prove their credits;
- an order directed to creditors located in the country to bring forth their claims;
- an order directed to creditors located outside the country to bring forth their claims;
- an order for publication of the declaration of bankruptcy; and
- an order to send to the commercial judge any information that may merit a criminal investigation.
Thereafter, an inventory of the bankrupt’s goods is performed, which are under the court’s supervision as of the date that the decision was produced.
The first general creditors’ meeting is constituted by the bankrupt’s creditors. This meeting is in charge of the administration of the bankruptcy mass (the creditor’s mass) and of the defence of its interests. The administration and defence may be performed either by the trustees appointed to liquidate and administer the goods; or by the liquidator, who shall be in charge of the liquidation of the bankruptcy mass, and the Commission of Supervision, which is constituted by three of the main creditors, which will supervise the liquidator and the liquidation process. The second creditors’ meeting is in charge of making a list of the credits, specifying each of them and the order in which they shall be paid.
During the first general creditors’ meeting, any of the creditors can propose that the creditors continue the liquidation of the bankruptcy alone. If said measure is approved by the simple majority of votes of those creditors that have more than half of the all the credits, the court will agree upon the liquidation by the creditors. Once the liquidation by creditors is declared, during the same meeting the creditors will name a group of businesspeople for the position of liquidator from which the judge will select the liquidators. The judge will also name three creditors to occupy the Creditors’ Commission entrusted with participating in and overseeing the administration and liquidation of the company. The debtor can also name one representative to oversee and participate in the administration and liquidation of the company. The liquidator will assume the position of the trustees and will proceed to liquidate the company under supervision of the courts.
Additionally, at any stage of the bankruptcy procedure, there is the possibility of reaching an agreement between all the creditors and the bankrupt company to proceed with the qualification and liquidation of the company; the decision to proceed with the agreement must be unanimous. In this case, all privileged and mortgage creditors will not be able to vote in the creditors’ meetings, for they already have their credit qualified implicitly in their securities. To be able to vote, they must surrender all their privileges. If said agreement is achieved, a meeting with non-privileged creditors will be held to qualify non-privileged credits, and once the meeting has taken place a vote to ratify the agreement will be held. For said agreement to be approved, it must have the votes of two-thirds of all creditors that represent at least three-quarters of the credits, or three-quarters of all creditors that represent two-thirds of the credits. The judge must approve the agreement.
If no agreement is achieved, the trustees will continue to represent the creditor’s mass as liquidators and, if authorised by the judge, will proceed to liquidate the bankrupt’s assets by selling them. As set forth in article 1,040 of the Commerce Code, the judge will also decree the order in which creditors must be paid, taking into account that privileged creditors will be paid first.
Regarding atraso proceedings, under article 898 of the Commerce Code, the only person who may initiate the atraso judicial process is the merchant or company that has ceased making payment of its debts as they become due, owing to liquidity (cash flow) problems, but whose assets are ‘positively’ greater in value than its liabilities. To initiate the proceedings, the company must declare its state of atraso before the courts to be authorised to proceed with the ‘friendly’ liquidation of its businesses within a period of time that will not exceed 12 months. During said period, the company is obligated to abstain from entering into any operations that may be considered to exceed the simple retail operations of the company.
27 How easy is it to enter into and terminate employment contracts?
Currently there is an absolute prohibition to dismiss workers in Venezuela, with the exception of directors and certain high-ranking officers. In the current situation, to dismiss an employee, prior authorisation needs to be obtained from the Labour Inspector, by following a procedure and only with due cause (from the limited list provided for under the Labour Law). In practice, the authorities grant very few authorisations for terminations.
The immunity from dismissal is granted in favour of employees with more than one month of service; workers with labour contracts for specific period of time (while the term of the labour contract has not finished); and workers hired for specific work (while such specific work or the worker’s obligation has not finished). Expressly excluded are workers qualified as management personnel, and seasonal or occasional workers.
Workers in Venezuela cannot waive their rights under any circumstances and, if waived, such waiver shall be deemed null and void. Thus, workers will not be able to reach any kind of settlement where they renounce benefits. Certain formalities should be complied with when the termination is carried out, basically ensuring that the employee not only signs a release document, but a detailed receipt that lists each of the concepts for which payment is made (salaries, pending holiday time, overtime, etc). The simple payment of the amounts owed and negotiated and the signature of a receipt will not constitute a valid release. The employee needs to receive a detailed explanation and acknowledge receipt of such.
In reference to ‘management personnel’, a company would be entitled to terminate the labour relationship based on a unilateral and unjustified dismissal only if the employees being dismissed qualify as ‘management personnel’, which concept excludes every employee with the right to the immunity of dismissal (as explained above).
Employees are qualified as ‘management personnel’ when, due to the nature of the services provided, they inter alia:
- take part in the decision-making process;
- have the capacity to act on behalf of the company, represent the employer before other employees or third parties, and may substitute the employer in his or her duties in whole or in part; or
- take part in production strategic planning, and in the selection, hiring or movement of personnel.
Additionally, also considered as ‘management personnel’ is every person that, on behalf of the employer, performs administration or management duties, such as directors, managers, administrators, industrial relations chiefs, personnel chiefs, and other persons performing management or administration duties. The illustrative statement regarding denominations and officers is not limited. However, the interpretation should be restricted and the application is strict, because it is a legal exception and because all the employees have the right to immunity of dismissal.
28 What are the key rights of local employees?
Venezuelan labour legislation provisions are a matter of public policy, meaning that they may not be waived, and the legislation governs both Venezuelans and foreigners in respect of work done or agreed to be done in Venezuela.
As a result of the foregoing, choosing foreign legislation to govern the benefits and conditions of Venezuelan or foreign employees who render services in Venezuela is not valid; no waiver by employees in respect of the benefits contemplated under the Venezuelan labour regulations is valid; and the fact that the employer or employees may be foreigners is of no relevance. If the rendering of services is carried out in Venezuela, this will be subject to Venezuelan labour regulations, provided that the labour relationship is agreed in Venezuela.
Labour relations in Venezuela are regulated mainly by the Labour Law, as well as various regulations and decrees enacted by the government.
The Labour Law sets the minimum benefits that any employee must receive while rendering services to an employer and on his or her termination (payable regardless of any bonuses or special notifications). The minimum mandatory benefits that must be considered to calculate the labour contingencies include the following:
- seniority indemnity;
- profit sharing;
- holiday bonus;
- meals; and
- indemnities due to unjustified dismissal.
If an employee renders his or her services beyond his or her working hours, this will be considered as overtime and, as a consequence, the employer must pay an extra charge. If such employee qualifies as a ‘direct employee’ (any employee partaking in the decision-making process or the orientation of the company, as well as any employee that represents the employer before other employees or third parties, and that can replace, in full or in part, the employer’s role), his or her working hours may be extended.
As previously mentioned, there is a restriction on the dismissal of employees as a consequence of presidential decrees on this matter. The general principle is that any employee rendering services to an employer for a period longer than one month and not considered to be a directing employee cannot be dismissed without a cause that has been previously determined by the Labour Inspector as lawful. Approval to dismiss an employee is seldom granted.
29 What are the main restrictions on engaging foreign employees?
Foreign individuals will require a working visa and permit to permanently work in Venezuela. In addition, the Venezuelan Organic Labour Law provides that Venezuelan employers (domestic or foreign) shall have no more than 10 per cent of foreign employees in their payroll. The same Law and its regulations allow for some exceptions in specific circumstances provided that a special permit is obtained from the Labour Inspector of the jurisdiction where the employees may be required to perform their activities.
If foreign companies can substantiate the reasons why foreign employees are required to perform certain tasks, the permits are usually granted.
30 What are the other key employment law factors that foreign counsel, investors and businesses should be aware of?
In addition to the prohibition on dismissing workers without government authorisation, an area attracting a lot of attention during the past few years has been workers’ safety and environmental conditions at their place of employment. The labour authority frequently conducts inspections to ensure compliance with the applicable regulations.
Regarding the prohibition on dismissing workers, while a negotiated resignation is a valid and legal mechanism to terminate a labour relationship, it is important to bear in mind that labour benefits set forth in the Venezuelan labour regulations are a matter of public policy, meaning that they may not be waived.
As previously mentioned, workers’ rights in Venezuela cannot be waived by workers under any circumstances; if waived, such waiver shall be deemed null and void, and can be challenged by an employee at any time for up to 5 or 10 years after the termination of the working relationship, depending on the reason of the claim. Thus, workers will not be able to reach any kind of settlement where they renounce their rights.
When a negotiated resignation is agreed between employer and employee, certain formalities must to be complied with when the termination is made, which entail basically ensuring that the employee not only signs a resignation and release document, but also a detailed receipt listing each concept for which payment is made (salaries, overtime, etc). The simple payment of the amounts owed and negotiated and the signature of a receipt will not constitute a valid release. The employee needs to receive a detailed explanation and acknowledge receipt.
31 Describe the intellectual property environment. How effective is enforcement and what are the key current issues?
Venezuela has delayed the registration of patents and invention rights, and while no official policy has been enacted in this regard, for several years we have seen a reduction in – if not a total stop on – the granting of patents. There have been some attempts to approve regulations that will limit the rights regarding patents.
The registration and granting of trademarks continues, with the government granting trademark rights and protections to their owners.
Legal reform and policy
32 What are the key issues in legal reform, government policy and the economy?
Most associations of companies are requesting substantial changes to the legal system, especially, inter alia, to ensure legal stability, respect of private property, a reduction of government controls, elimination of foreign exchange controls, and a change in employee severance payments.
Venezuela is currently experiencing some political turmoil, with certain sectors of the country requesting a change in government direction from a socialist to a more market-oriented position. Other sectors are seeking a change of government, and are working towards a political referendum that may oust the president and force new elections. Such situation is shadowing any initiatives to make changes in the legal system. While such changes are required, the economic needs of the country, such as controlling inflation and devaluation, will take priority over any changes of law.
33 Are there any significant legal developments ongoing or pending? What are their effects on the business environment?
Currently, the political environment is overshadowing any required changes to the legal system. Such changes are expected to come into being if there are changes in the policies of the government.
Resources and references
34 Please cite helpful references, for example sources of law, websites of major regulators and government agencies.
Published January 2019