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BUSINESS IN VENEZUELA
VI. INVESTING IN VENEZUALA

Foreign Investment are regulated by Decree 2.095 of February 13th, 1992. Such Decree submits foreign investments to the Decisions 291 and 292 of the Commission of the Cartagena Agreement. Following these regulations, all foreign investments are deemed approved and they are only subject to registration with the appropriate agency (defined below), provided that they do not contravene any provision of general applicability under Venezuelan legislation.
A foreign investment may be made to create a new company or stock corporation, but also foreign investors may acquire equity participation in local companies with no other limitation than those established with respect to the reserved business activities set forth in the applicable legislation. The jurisdiction to regulate foreign investments, technology transfer agreements and external credits, is granted to the Superintendency of Foreign Investments (SIEX), except for some sectors which are granted
to other agencies as appropriate:
• Foreign investments in banking which is granted to the Superintendency of Banks and Other Financial Institutions;
• Foreign investments in insurance granted to the Superintendency of Insurance;
• Foreign investments, technology transfers and external credits in petroleum, coal, petro-chemical and mining to the Ministry of Energy & Mines; and, finally,
• External credits to public sector entities are subject to the jurisdiction of the Office of Public Finances of the Ministry of Finance.

The degree to which a foreign investor may exercise control over a Venezuelan company depends on the sector of the economy in which the local company operates and the foreign investment classification assigned to the company by the appropriate agency. There are three classifications: foreign (more than 49% foreign equity); mixed (49% or less but more than 19.9% foreign equity); and national (less than 20% foreign equity). In classifying the company as foreign, mixed or national, the appropriate agency examines both the percentage of equity held by the foreign investor and the degree of control which the foreign investor is entitled to exercise over the technical, financial, administrative and commercial management of the company. In addition, shares owned by foreign investors with no voting rights in the technical, commercial, administrative and financial management of the company, are not computed for the purpose of classifying the company as foreign, mixed or national. In such cases, these shares may only grant voting rights to their corresponding holders for the specific purpose of deciding upon the approval the company's year end balance sheet. The allowed proportion of foreign investment depends upon the sector in which the company is planning its activities, as there are some limited sectors reserved to national enterprises (See infra Section VIII, 3)

Foreign investments related to contracts in the national interest referred to in Article 126 of the Venezuelan Constitution and in defense industries are exempt from all of the foreign investment rules.

1. Local Company Law and Formation Requirements
The Commercial Code is the basic law applicable to companies incorporated in Venezuela. In general terms, companies or mercantile associations are those which have as their corporate purpose, one or more commercial activities. Nevertheless, corporations and limited partnerships are always attributed a mercantile nature by the law, whatever their purpose may be, except when they are engaged exclusively in agriculture or cattle raising. Corporations are governed by the by-laws or articles of association agreed between the parties, by the provisions of the Commercial Code, the Civil Code and the provisions of special laws which may be applicable to a particular business area.
The Venezuelan Commercial Code provides four different types of companies: the stock corporation, which is the most common form of corporation used in Venezuela to do business; the limited liability company, which in accordance with the former Income Tax Law had a tax advantage which is no longer applicable; the partnership and the limited partnership.
The stock corporation does not require a minimum share capital and the transfer of shares is not subject to the formalities which apply to the limited liability company. The company is managed by one or more administrators or a Board of Directors whose members may be foreigners.

2. Stock Capitalization Requirements
The shareholders must subscribe the total capital stock and at least 20% thereof must be paid-in at the time of incorporation. Although, in general, no minimum amount of capital stock is required, certain particular requirements may be established by special laws regulating a certain business area. The Commercial Code requires at least two shareholders for the purpose of incorporation, although immediately thereafter all shares may be transferred to a single shareholder.
With regard to capital contributions, limited liability companies are required to have a minimum capital of Bs. 20,000.00 and a maximum capital of Bs. 2,000,000.00. However, the law does not require a minimum or maximum capital contribution for stock corporations. Investments may be made in foreign currency or in kind by contributing capital goods, semi-finished products or raw materials. Intangible assets may also be capitalized but only when specific credits exist for technology already transferred. Other credits are also eligible for capitalization.

3. Creation of a Subsidiary
A wholly owned subsidiary of a foreign investor is allowed in Venezuela. As mentioned above, the Commercial Code requires at least two shareholders for the purpose of incorporation, although immediately thereafter all shares may be transferred to a single shareholder. The most frequently used corporation is the stock corporation.

4. Joint-Venture Company
Foreign investors may also enter into joint-ventures. As there are very few minority protection provisions in the Commercial Code, it is advisable to provide in detail in the articles of incorporation/by-laws all the rights corresponding to the minority shareholders.
To classify the company as a mixed company (i.e. minimum of 20% and maximum of 49% of foreign
participation, see Section III) normally the appropriate agency will not permit the foreign investor to elect a
disproportionate number of Directors. It will allow a foreign minority shareholder to retain a veto over
certain extraordinary matters such as mergers, dissolution, liquidation, capital increases, amendments to the
articles of incorporation/by-laws, the sale, pledge or mortgage of all or substantially all of the corporation's
assets, borrowings, capital expenditures and the contracting of obligations exceeding certain amounts and
the appointment and removal of the external auditors of the company. Nevertheless, the appropriate agency
will permit the "national" investor to elect foreigners as Directors without affecting the classification of the
company.

5. Local Participation Laws
Andean Community Decision 291, approved in March, 1991, has eliminated the requirement of transformation (divestiture) into mixed or national company that a previous Andean Community decision had established. Thus, all foreign companies now may enjoy the free trade program provided its products obtain a certificate of origin. Decision 291 has been published in the Official Gazette on June 28, 1991 and is accordingly in force in Venezuela.
There are some reserved sectors which require a local participation and which may be summarized as follows:
a. Sectors reserved to national enterprises by Foreign Investment Regulations (Decree 2.095) (i.e. maximum foreign participation 19.99 %):
   i. Television and radio broadcasting and Spanish language newspapers.
   ii. Services in areas which require the participation of professionals whose
      practice is governed by national laws.
b. Areas reserved by special laws, i.e. hydrocarbons (reserved to the State, excluding participation by foreign or national investors except certain services), coastal navigation, among others, which are reserved to national companies. Companies operating in all other sectors may be formed with up to 100% of foreign ownership. Such companies may remain as foreign owned companies indefinitely.

6. Purchase of Business in Venezuela by a Foreign Corporation
A. Purchase of Stock or Assets of an Existing Company
Subject to the duty to file notice of the transaction with the appropriate agency, a foreign investor may
(i) purchase the shares of another foreign investor in any Venezuelan company;
(ii) purchase the shares of the
national investor in any Venezuelan company; or
(iii) purchase the assets of any company in Venezuela. This is provided that the acquisition of the shares by the foreign investor does not contravene Venezuelan legislation.

Similarly, a foreign investor may purchase the shares of another foreign investor in any offshore company holding shares in any Venezuelan company. In this latter case, however, it is not necessary to file notice of
the transaction with the appropriate agency.
Except for the sectors reserved to national companies (see Section VIII, 5) owned by foreign or national investors, foreign investors may freely purchase stock of listed companies in the stock exchange. In this case, the registration with the appropriate agency has to be done only for the stock that the investor holds at the end of the calendar year. As a result, foreign investors may participate in the stock exchange and buy and sell shares during one year and are only obliged to comply with the general regulations pertaining to the stock exchange applicable to both national and foreign investors.
With regard to the sale of shares, the Foreign Investment Regulations establish that the acquisition by foreign investors of shares owned by national investors is subject to the subsequent registration within sixty (60)
continuous days from the execution of the commercial transaction.
In the event of acquisition of shares owned by nationals, the regulations establish that the value of the investment is the amount of foreign exchange brought by the foreign investor to pay for the acquired shares.
When the investment is made in national currency (bolivars) which could be remitted abroad by the foreign investor, the registration will be calculated based on the exchange rate prevailing at the time the investment was made.

B. Capital Increases
A foreign investor may subscribe to a capital increase in any Venezuelan company, provided notice of the transaction is filed with the appropriate agency. Of course, foreign investment after the capital increase, may
not exceed the maximum proportion allowed in reserved sectors to national companies (see Section VIII, 5).

7. Tax or Other Incentives
The transfer of stock is not subject to taxation unless a capital gain is verified as a consequence of the transaction. A recent decree established a withholding tax (which in fact is an advance payment of the final income tax determined when the yearly income tax return is filed) for all sales of stock not made through the stock exchange.
Gain on the sale of shares of a company incorporated in Venezuela is taxable irrespective of the domicile of the seller and purchaser or the fact that the sales contract is executed outside Venezuela. Gain on the sale of shares of an offshore holding company is not subject to Venezuelan income tax, even if the only assets of the offshore holding company are the shares of the Venezuelan company. Transfer of stock made through the stock exchange is subject to a withholding tax of 1% of the selling price, independently of any capital gain.
In the case of the purchase of an ongoing business or all or substantially all of its assets; five percent (5%) of the gross sales price must be withheld by the purchaser and paid to the treasury. In order to avoid the transfer of liability of debts of the seller, notice of the bulk sale must be published three times at ten day intervals both in a local newspaper of the place where the seller carries on business and in a national daily newspaper. The document evidencing the transaction must be filed at the Commercial Registry. There are certain fiscal advantages which may be enjoyed by taxpayers, including joint ventures with the participation of foreign capital or even by foreign corporations, if all the requisites contained in the fiscal legislation and the foreign investment rules are complied with. In accordance with the general guidelines established to that effect by the Venezuelan Income Tax Law, the National Executive issued a decree which grants a tax rebate to taxpayers, individuals or corporations, receiving income derived from, among others, the manufacture of industrial products and agro-industries, tourism, agriculture, cattle breeding and fishing.

8. Other Issues
A. Registration Requirements
To legally form a corporation, the Commercial Code requires registration with the Mercantile Registry of the Articles of Incorporation and By-Laws of the company and its subsequent publication in a local newspaper. The shareholders must file the evidence of the payment of the capital contribution with the Mercantile Registry.
If all the legal requirements are not fulfilled, the company is not considered as legally existing and therefore the shareholders, the administrators or any other person who has acted on behalf of the company, will be personally liable for all ventures the company enters into. Registration of the corporation normally takes from one to two weeks, before finishing all the procedures for incorporation.

B. Administration of the Company
For the purpose of incorporation, there are no restrictions regarding nationality or residence of directors or officers. Nevertheless, the labor relations manager must be a Venezuelan citizen. The direction and
supervision of the corporation may be vested in a Board of Directors. By virtue of the law, a general shareholders meeting must be held at least once a year to approve the financial statements and the distribution of profits and to appoint the Board of Directors and Examiners of the company.

C. Place of Meeting of Board of Directors or Shareholders
The Commercial Code does not establish any limitation in this regard except that the call for meeting must specify where it will be held. Therefore, the Articles of Incorporation must provide rules on the place of the meetings.

D. Registration Fees
There is a registration tax for incorporation of the company and registration of the branch equal to one percent (1%) of the capital stock or the capital allocated to the branch.

E. Administrative Regulations
The administrative regulations of importance to comply with after incorporation and registration of companies in Venezuela, are: obtainment of the tax information registry for the new company; classification of the company by the appropriate agency; and, the registration of the foreign investment with the appropriate agency.