Venezuelan families using Singaporean companies in their international tax and succession planning structures will want to consider restructuring techniques in view of Singapore recently being characterized as a “low-tax jurisdiction” under Venezuelan law. Venezuela’s low-tax-jurisdiction rules require Venezuelan residents who own, directly or indirectly, interests in foreign entities organized and located, or resident, in low-tax jurisdictions to report such interests and/or to pay tax currently on all income of the entity, regardless of whether any income is in fact distributed to them. The benefit of holding assets in a structure that is not associated with any low-tax jurisdiction, such as Singapore, is that the growth of such assets is not reportable or taxable until that growth is actually distributed to the Venezuelan resident individual/entity.

The Venezuelan Tax Administration recognizes that the implementation of its low-tax-jurisdiction rules is difficult and riddled with traps for the unwary. To address this issue, the tax administration has adopted a twofold strategy: The relevant legislation (1) includes various presumptions of the existence of a low-tax-jurisdiction investment that essentially shift the burden of proof to the taxpayer, creating an obligation for him or her to provide evidence that he or she does not have such investment and (2) provides for hefty criminal and monetary penalties for failure to declare income derived from low-tax jurisdictions.

Definition of Low-Tax Jurisdiction

By way of administrative resolution published in the Official Gazette No. 37.924, dated 26 April 2004 (Resolution), the Venezuelan Tax Administration established an official list of low-tax jurisdictions for purposes of complying with international fiscal transparency rules. Article 1 of the Resolution provides that a jurisdiction will be characterized as a low-tax jurisdiction if the jurisdiction’s rates of income tax are below 20 percent, except where the jurisdiction has a double taxation agreement with Venezuela that includes a provision for the exchange of information (treaty exception). Although the tax administration has created a list of low-tax jurisdictions, it is important to note that a jurisdiction qualifying as a low-tax jurisdiction does not need to be expressly included in the official list for such a jurisdiction to be considered a tax haven by the Venezuelan tax authorities. Thus, for example, in circumstances in which a jurisdiction reduces its rates of income tax below 20 percent, as in the case of Singapore’s recent rate reduction to 18 percent, such reduction will automatically trigger that jurisdiction’s characterization as a low-tax jurisdiction for Venezuelan tax purposes in the absence of the treaty exception.  

Investments in Low-Tax Jurisdictions

A resident Venezuelan investor’s “investment” will be deemed located in a low-tax jurisdiction in any of the following cases:

• The accounts or investments of any kind are placed in institutions located in a low-tax jurisdiction
• There is a domicile or post office box in a low-tax jurisdiction
• The place of effective management is in a low-tax jurisdiction, or there is a fixed place of business in a low-tax jurisdiction
• It is incorporated in a low-tax jurisdiction
• It has a physical presence in a low-tax jurisdiction
• Any kind of legal transaction is executed, regulated, or completed in compliance with the legislation of a low-tax jurisdiction

Thus, for example, a company that is not organized in a low-tax jurisdiction but that has a “physical presence, address, or post office box” in a low-tax jurisdiction will qualify as a low-tax jurisdiction entity. Also, a company organized in a non-low-tax jurisdiction will become tainted with “low-tax-jurisdiction entity” status if its place of effective control or management is in a low-tax jurisdiction.

Moreover, accounts opened in financial institutions located in low-tax jurisdictions and owned by a spouse, concubine, ascendant, or descendant are deemed investments of the taxpayer. Unless otherwise evidenced, any transfer made or ordered by the taxpayer to deposit an amount in an investment or savings account (or any other similar type of account) with a financial institution located in a low-tax jurisdiction is deemed a transfer made to an account whose owner is the taxpayer.

It is also noteworthy that Venezuelan banks and other Venezuelan financial institutions must inform the tax administration about Venezuelan resident investors who have accounts in banks or other institutions located in low-tax jurisdictions, the terms and conditions of their deposits and transfers, and any type of operation made from those bank accounts.

In analyzing particular investments, the tax administration will examine the specific transaction between a Venezuelan taxpayer and a foreign entity or arrangement created under a foreign law. In so doing, it is unlikely that the tax administration will go beyond the first jurisdiction reached (i.e., the jurisdiction in which the entity or arrangement having the transaction with the Venezuelan taxpayer was formed). Additionally, the specific nature of the entity having the transaction with the Venezuelan resident investor controls. This means that if a corporation is formed under the normal corporate laws of the state of incorporation, the question is simply whether it is taxed at a rate greater than 20 percent. Whether the effective rate that applies to the entity in question meets the minimum requirement is irrelevant for purposes of the analysis. Thus, if the jurisdiction taxes corporations formed under the normal corporate laws of that state on a territorial basis, the fact that the corporation in question pays no tax is irrelevant. This case is to be distinguished from the case where the jurisdiction, in addition to the possibility of incorporating under its normal corporate laws, allows incorporation under a special statute for companies that do business entirely offshore; in that case, unlike companies incorporated under normal corporate laws that are taxed at a rate greater than 20 percent, the special status corporation is tax exempt. A corporation in the second case (i.e., a special status corporation) would be deemed incorporated in a “low-tax jurisdiction.”

Active Business Exclusion

An investment in a low-tax jurisdiction may qualify for an active business exclusion, which effectively exempts it from the adverse tax and reporting consequences of the low-tax-jurisdiction rules. The active business exclusion applies when more than 50 percent of the total assets of the investment comprise fixed assets, used in connection with the conduct of an active business in the low-tax jurisdiction. The active business exclusion does not apply to the extent that more than 20 percent of the total income (on a gross income basis) from the investment constitutes passive income (e.g., interest, royalties, and the like).

Taxation and Reporting of Investments in Low-Tax Jurisdictions

The tax consequences to the resident Venezuelan investor who owns an investment situated in a low-tax jurisdiction are that the income derived from such investment will, in general, be considered the income of the resident investor for purposes of Venezuelan income tax. Thus, an investment in a company situated in a low-tax jurisdiction, such as Singapore, will result in the Venezuelan resident investor being deemed to earn the income of the company regardless of whether the company makes distributions to the resident investor (i.e., such legal persons and entities situated in low-tax jurisdictions will be considered “transparent” for fiscal purposes) even if no income, dividends, or profits have been distributed to the resident investor. Unless otherwise evidenced, amounts received from an investment located in a low-tax jurisdiction are considered gross income derived from the investment.

To determine the Venezuelan income tax on gains or losses on investments in low-tax jurisdictions, taxpayers may proportionally impute to their direct or indirect participation in the investments the corresponding costs and deductions so long as they keep the tax administration informed and updated on accountability, including the preparation and filing (with the annual income tax return) of an informative disclosure on the investments that have been executed or are being maintained in low-tax jurisdictions. Copies of the relevant bank statements, investments, savings, and any other documents that evidence the investment must accompany the disclosure. The tax administration can request other documents or additional information to be submitted by the investor.

Penalties for Failure to Report Income from Low-Tax Jurisdictions

Venezuela enacted an Organic Tax Code on 17 October 2001 (OTC 2001). The OTC 2001 provides the following penalties in regard to low-tax jurisdictions: (1) Failure to file the informative return on low-tax-jurisdiction investments will be punishable by a fine ranging from 1,000 to 2,000 Tax Units (1 T.U. is equivalent to VBS46 = USD21) (approximately USD30,000); (2) tax evasion, normally punishable by imprisonment ranging from six months to seven years, will be increased from one-half to two-thirds of the original amount if the fraud involves nondisclosure of investments made or maintained in tax havens.

Ronald Evans, principal, Baker & McKenzie Caracas, and author of the Venezuela country report on LawInContext’s Private Banking Helpdesk.