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BUSINESS IN VENEZUELA
SPECIAL ISSUES IN DOING BUSINESS IN VENEZUELA

1. Local Agents, Distributors and Franchises
Although the concept of a business or commercial representative is not regulated in the law, it consists of a formula through which a foreign corporation can carry out a certain level of operations in Venezuela. The representative is not considered a duly authorized officer of the corporation and, therefore, may not assume any obligations on behalf of the company, except if a power of attorney has been granted in his favor. Normally, the representative or agent limits his activities to initiate negotiations, to act as an intermediary between the company and local purchasers or potential clients, and to carry out marketing analysis. The agent must pay the corresponding minimum municipal tax levied by the Municipality in which any commercial activities are performed.

The agent will also be subject to the payment of his personal income taxes derived from the fees or compensations received for the exercise of his activities. Nevertheless, the principal will not be considered as doing business in Venezuela unless there are some other factors which make it possible to consider its operation as taxable in Venezuela. According to the Venezuelan Code of Commerce, the agent or representative will be regarded as a "professional merchant" (a person who customarily performs commercial activities) and, therefore, would theoretically be obliged to keep all the legal accounting and commercial books. However, due to the fact that agents or representatives are not regulated in the law, it is the practice of the Office of the Commercial Registry not to authorize the issuance of such books for the use of agents or representatives. The relationship between the parties must abide by the dispositions of general applicability contained in the law and the terms and conditions of the corresponding agreement. With respect to distribution and franchising agreements of products identified under foreign-owned trademarks, additional formalities contained in the rules applicable to foreign investments and transfer of technology must be observed, such as registration with the appropriate agency, normally the Superintendency of Foreign Investments (SIEX). The appropriate agency, normally the Superintendency of Foreign Investments (SIEX), is the body charged with registering licenses and in general the transfer of technology contracts, which are deemed approved and subject only to registration. For the registration of the agreements, an original contract executed by the parties must be submitted to the appropriate agency within sixty (60) calendar days following the date of execution.

Income tax authorities may object to excessive royalties if it is considered that payments agreed for the importation of technology are not necessary or are unusual or if the technology may be available in the country and need not to be imported. There are certain clauses that must be inserted in licenses, which refer basically to the identification of the parties, nationality, currency and country for payments, among others. The restrictive clauses prohibited according to Decision 291 of the Andean Community, include those which could lead to a monopolistic situation. Otherwise, the parties may freely contract. From a different viewpoint, in principle, agents, distributors or franchisers do not acquire additional rights as employees under the Venezuelan Labor Law, unless it is proven that there is a labor relationship between the parties which includes subordination, instead of independent contracting.

2. Intellectual Property Protection
A.- New Laws Improve And Extend Intellectual Property Rights In Venezuela 1994 marks the beginning of a new era of intellectual property rights in Venezuela. First, Decision 344 of the Andean Community has become effective since January 1, 1994. This law has ended a process of consecutive laws issued at the Andean Community (formed by Peru, Colombia, Bolivia, Ecuador and Venezuela). This process started years ago with the enactment of Decision 85 (which became partially effective in Colombia, Ecuador and Peru) approved by the commission on June 5, 1974. Then, Decision 311 was substituted by Decision 313. Finally, Decision 344 has become effective, thus, substituting prior Decision 311. Decision 344 has clarified many loopholes contained in Decision 313, such as, the evidence needed in order to show that a mark is well-known as well as the patents compulsory licenses regime among others. Formerly, Venezuela was governed by an industrial property law enacted in 1955 and by a copyright law of 1962. Logically, these laws were drafted in a way which reflected the tendency of that time, which included, a rigid concept of the territoriality of law as well as the protection of local manufacturers (closed economy). Consequently, many limitations could be found in these laws (e.g., products claims covering chemical or pharmaceuticals were not allowed, protection of well-known marks was not clearly defined).

B.- Decision 344 Of The Andean Community And The New Venezuelan Copyright Law In A Nutshell Decision 344 of the Andean Community is a comprehensive law which embodies Patents, trade secrets, trademarks as well as appellations of origin. A modern patent system is established (including the addition of utility patents which were not included in the former industrial property law of 1955) wherein all fields of technology are patentable with the following exceptions:
a) Inventions that violate public policy, morals or proper customs;
b) Inventions that are obviously contrary to the health or the life of persons or animals, to plant preservation, or to preservation, or to the protection of the environment;
c) Animal species and breeds and essentially biological procedures for obtaining them:
d) Inventions relating to matter composing the human body and the genetic identity thereof:
e) Inventions relating to pharmaceutical products shown on the list of basic medications of the World Health Organizations.

Working is no longer required, however, it is recommended to submit before the patent office relevant evidence showing use of the patent, in order to overcome an eventual compulsory license petition. In the meantime, Decision 345 of the Andean Community has been enacted establishing a comprehensive regime of protection of plant varieties (variety is defined as a set of cultivated botanical individuals distinguished by certain morphological, physiological, cytological, and/or chemical characteristics that can be perpetuated by reproduction, multiplication, or propagation). Trade secrets are included for the first time in an industrial property law effective in Venezuela and the Andean Community. In order to be considered as a trade secret the information must be secret, recorded in documents and have actual or potential commercial value by virtue of its secrecy. In addition, the person who lawfully controls the secret must take reasonable measures to maintain its secrecy. Likewise, a complete trademark system is contained therein, in which a broad protection of well-known marks is established.

Moreover, the Venezuelan Supreme Court in a recent decision known as the GALERIAS LAFAYETTE case, recognized such a protection declaring that the well-known principl constitutes an exception to the territoriality of the law. In order to determine whether a mark is well-known, the following criteria, among others, shall be taken into account:
a) The extent to which it (the mark) is known among the consumer public.
b) The degree and range of dissemination, publicity or promotion of the mark.
c) The age and continuous use of the mark.
d) An analysis of the production and marketing of those products distinguished by the mark.

Finally, Decision 344 protects Appellations of Origin. There is a new Venezuelan Copyright law (published in Official Gazette No. 4.638 extraordinary, dated October 1, 1993). Among others, the new Copyright Law has included the following innovations:
a) Protection of computer programs (through the creation of a new chapter).
b) "Droit de suit
c) The term of the copyright is extended to life of the author plus 60 years (formerly, the term was life of the author plus 50 years).

C.- Summary Of Intellectual Property Rights
a) Trademarks
1) Types: Product mark, service mark, collective marks, certification mark and trade name
a) Duration: 10 years.
b) Use: A mark shall be canceled if no use can be evidenced during the three years prior to the filing of the cancellation action without justified cause.
c) Rights conferred: The right of exclusive use is acquired through registration.

b) Copyright
1) Subject matter: Any creative work of literary, scientific or artistic nature notwithstanding its nature, form of expression or destiny (computer programs are included in section 2 as proper subject matter).
2) Duration of rights:
a) The life of the author plus sixty years.
b) Anonymous, pseudonymous, audiovisual, sound recording and computer software works: 60 years from first publication
3) Source of rights: Creation of the work.

c) Patents
1) Types: - Invention patent - Utility models - Industrial designs - Plant varieties are protected through a special law

2) Duration
a) Invention Patent: 20 years from the date of filing.
b) Utility models: 10 years from the date of filing.
c) Industrial design: 8 years from the date of filing.
d) Plant varieties: i) 20 to 25 years (in the case of vines forests trees, and fruit trees, including their rootstock); and ii) 15 to 20 years for other species.

3) Use: If the patent has not been used after a period of three years from the date of grant, or four years from the days of its application, whichever is greater; the patent office may issue a compulsory license.

4) Rights conferred: Confers its holder with the right to prevent third parties form working the patented invention without his consent.

3. Taxation System A. General Taxation Principles The Venezuelan taxation system is based on constitutional rules which contain the fundamental principles governing this subject.
a. Equality Principle: This principle states that the income tax system should foresee a just distribution of the taxes in accordance with the economic capacity of each person.
b. Legality Principle: This is one of the country's fundamental principles and states that every tax must be governed by a law, i.e., must be created by law. Also, all tax exemptions must be previously established by law.
c. Generality Principle: The taxation system should be applied on a general basis, that is, it should encompass the different categories, matters or acts which are taxable by law, so that given a particular situation, the respective tax will be applied without distinguishing between persons or goods. This principle is a complement to the Equality Principle.
d. Territoriality Principle: Of utmost importance is the principle of territoriality. According to this principle only income derived from acts carried out or deemed to be carried out within the national territory are taxable.

B. Income Tax Law
In view of the territoriality principle, the Venezuelan Income Tax Law (VITL) contemplates that only those payments made within the country are deductible, however, there are exceptions to this rule such as payments abroad for technical assistance, technological services, royalties and professional fees, provided that the corresponding income tax has been withheld. In the case of expositions and fairs carried out abroad for the purpose of promoting goods manufactured in Venezuela, deductions corresponding to travel, advertising, office, transportation of goods, etc. are allowed. The VITL states that debit notes issued by branch companies do not constitute sufficient proof of the valu of the merchandise, unless they are accompanied by the original documents issued by the vendor. The legal form to determine the Income Tax is based on the taxpayer's gross income less the costs and deductions permitted by the Law, that is, those normal and necessary expenses incurred by the taxpayer in the country to obtain his income.

The VITL establishes that the annual income obtained by corporations is subject to a progressive tax rate a follows: Fiscal Unit * Tax Rate Up to 2,000 15% From 2,000 to 3,000 22% Over 3,000 34% Residents are also subject to a progressive tax rate that ranges from a minimum of 6%, for an annual taxable income of up to 1,000 fiscal units; to a maximum of 34%, for an annual taxable income of over 6,000 fiscal units. Under VITL, non residents are those who have not stayed in the country for more than 180 days in calendar year nor in the year before. Non-residents have a special treatment, they are taxed with a proportional rate of 34% of their gross income. There are no taxes on dividends nor on the remittance of profits abroad, either for residents or non-residents. In the case of stock received as dividends, the cost is considered to be the nominal value (par value), except if the dividend corresponds to a revaluation of assets, in which case such stock would be considered to have no cost.

Capital gains are taxable as ordinary income and capital losses are deductible. However, capital gains obtained from the sale of shares in a Venezuelan stock exchange are taxed with a proportional rate of 1% of the gross income. Exporting goods to Venezuela is not an activity subject to income tax as it is considered as extraterritorial income for the foreign supplier since the basis for the enrichment was not made in the national territory. The importation of goods is subject to a customs tax to be paid by the local importer. Nevertheless, if the imported merchandise is sent by consignment to a local representative, the exporter shall be considered as doing business in Venezuela and, therefore, the final sales shall be taxable. In such cases, the income tax is imposed on 25% of final sales, which represents a presumed income.

C. Sales Tax The Luxury Consumption and Gross Sales Tax Law, enacted on September 1994, establishes a tax on the transfer of movables, the rendering of services and the import of goods and services. Under this law, the common taxpayers are individuals or corporations or any public or private entity, in their capacity as habitual importers of goods and services; manufactures; traders and independent providers of services with annual sales for amount superior to 12.000 F.U Currently the tax rate is 16,5%.

D. Business Assets Tax The Business Assets Tax Law (BATL) that entered into effect on December 1993, regulates a general ta that shall be paid for individuals or corporations for its tangible or intangible assets destined for the production of their income. This tax is a minimum alternative tax. That is, business assets tax is deducted from the income tax. Therefore, it does not increase the taxpayer's burden. The taxable base of this tax is the net average of the value of assets at the beginning and the end of the fiscal year. The tax rate is 1% of said average. There are other taxes to be taken into account as well, such as social security contributions, registration taxes, stamp tax and, in particular, the Industrial and Commercial Patent Tax. The latter is a local tax applied by the different municipal governments on commercial or industrial activities carried out within a specific area.

4. Currency Exchange Regime

Since April 17, 1996, the Foreign Exchange Regime in Venezuela is absolutely free. All the exchange controls established in July 1994, have been removed and the authorized banking institutions are able to sell and purchase foreign currency, with no limits and for all operations. The exchange rate will be will be floating with supply and demand, and the Venezuela's Central Bank is empowered to established a daily reference exchange rate. Therefore, at present all the transactions related to foreign investments, dividends, repatriation of capital, transfer of technology and royalty payments, as well as all interest and principal reimbursements relating to external credits, are to be effected at the free floating rate of exchange determined on a daily basis by the Venezuelan Central Bank. No legal or mandatory convertibility restrictions are applicable.

The Foreign Investment Regulations establish that all foreign investment must be registered with SIEX i order to evidence the value of the foreign investment which is constituted and represented by the assets located in Venezuela, but may also include off-shore assets which are required for export. However, the dollar registration of investment does not guarantee that capital may be repatriated at the same rate at which it was registered. As general rule, foreign investors are entitled to receive profit remittances on an annual basis up to 100% of the total net earnings which correspond to the foreign investor at the end of the fiscal year. No prior approval is required, but notice of the dividend remittance must be filed with SIEX along with the year-en information required. Dividends paid to non-domiciled individuals or corporations are subject to a withholding tax of 20% of the amount paid or credited to the account of the shareholder. Foreign currency for dividend remittances are purchased at the free floating rate of exchange quoted on the date of remittance. Any investment may be re-converted into foreign currency prior to repatriation by purchasing said currency at the floating rate then in effect.

5. Labor
A. Territoriality and Public Policy The provisions of Ley Orgánica del Trabajo (hereinafter "LOT" for its initials in Spanish) are of territ application and represent public policy, which means that they normally can not be modified or adapted by private persons. Those provisions rule Venezuelans and foreigners on any part of their labor relations rendered or agreed upon in the country. The law also applies to workers of foreign enterprises for all work carried out in Venezuela, even on a temporary basis. All companies, establishments, exploitations and enterprises, and also all work performed for non-commercial ends whether public or private, already existing or having been established in the territory of the Republic, are subject to "LOT".

B. Work day The law establishes a maximum work of 44 hours a week for day work, 40 weekly hours for night work and 42 weekly hours for mixed shifts. The work day may not exceed eight hours daily, the mixed shift may not exceed seven and a half hours daily, and the night shift may not exceed seven hours.

C. Seniority This is deemed by law to be an acquired right in favor of the employee, and is determined as follows: - After more than three and less than six months of service, an indemnity equivalent to ten days wages must be paid. - For each year of service or fraction thereof of more than six months, it is one month's salary. Should the dismissal be unjustified, the employer has to pay double said indemnity to the worker.

D. Advance Notice When the employment agreement for an undetermined term ends due to an unjustified dismissal, the employee is entitled to a previous notice as follows:
a.- After 1 month of uninterrupted work: 1 week in advance;
b.- After 6 months of uninterrupted work: 15 days in advance;
c.- After 1 year of uninterrupted work: 1 month in advance;
d.- After 5 years of uninterrupted work: 2 months in advance;
e.- After 10 years of uninterrupted work: 3 months in advance.
Instead of the prior notice, the employer may pay the worker the wages for the appropriate number of days, as an indemnity, and relieve the worker of his obligation to come to the job for those days. Should the dismissal be unjustified, the employer has to pay double said indemnity to the worker.

E. Dismissal and job stability Some employees cannot be dismissed, such as pregnant women and union representatives. They enjoy absolute job stability while their status lasts, but may be dismissed for legally justified causes according to "LOT", but with the corresponding authorization of the Labor Ministry. Other employees enjoy relative work stability after some time of employment. This means that they may be dismissed unjustifiably by paying an amount equal to double the seniority and the amount for previous notice.

F. Unions The Constitution and "LOT" grant freedom to unionize and regulate union memberships and its functioning, as well as the rights and obligations of the organization and its members. There may be unions of employers; unions of employees, workers or both; and of professionals or free-lance workers.

G. Collective labor conflicts Workers have a constitutional right to use a legal procedure established in LOT to settle controversies arising with the employer and if an agreement is not reached, to paralyze labor activities by means of a strike.

H. Venezuelans and Foreigners At least 90% of both employees and manual laborers in the service of an employer who employs ten or more workers, shall be Venezuelan. The salaries of the foreign personnel, employees and manual laborers, may not exceed 20% of the total salaries. The heads of industrial relationship departments, heads of personnel, captains of vessels or aircrafts, foremen or those exercising similar functions, must be Venezuelan.

I. Vacations When the employee has worked for one uninterrupted year he is entitled to enjoy a period of paid vacation equivalent to 15 working days. He is also entitled to enjoy one additional day for each year of seniority as of the second year, up to a maximum of 15 working days. The additional day is counted as of the effective date of "LOT" (May 1, 1991). The employee may work during the additional days of vacation if he so chooses, and in this case he would have the right to receive a separate payment of salaries for his work during vacations. Employers must pay to the workers at the moment of taking their vacations, in addition to the wages for the days of vacation, a special bonus equal to a minimum of seven daily wages, plus one daily wage per year of service. This bonus ceases to increase when it amounts to the wages of 21 days.

J. Salaries Wages and salaries are regulated only with respect to the minimum national salary established for workers by the Government. Above the minimum, the salary is established by mutual agreement with the worker in individual employment agreements or by means of collective employment agreement. Nevertheless, each employer must pay equal salaries for equal work without any discrimination.

K. Participation in the Company's Benefits In addition to the salary and bonuses paid to each worker, the employer should distribute among its employees 15% of its net benefits as a right of the employees, but this percentage some years may be less or more due to the limitations in the law. The computation takes into account the amount of the yearly profit, the salaries received by all employees and the salaries received by each employee. This obligation has a minimum limit of 15 days salary for each employee. The maximum limit is fixed at four (4) months' salaries and applies only to enterprises capital stock of more than one million bolivars and wit more than 50 workers; and a maximum limit of two (2) months' salaries to enterprises with capital stock of not more than one million bolivars or with less than fifty (50) worker When the employee has not worked the whole year, payment (even the minimum) shall be reduced proportionally to the complete months he worked.

L. Obligations towards public bodies L.1. Ministry of Labor The company must be registered before the Ministry of Labor in the area in which it is located. L.2.- INC Registration before the National Institute of Technical Education (INCE, Spanish initials) is required of al companies having more than five (5) employees and imposes several obligations upon the company, including: - The payment of an INCE educational tax equivalent to 2% of the total payrol of the company. - The workers must also contribute to INCE in the form of 1/2% of the tota amount of participation in the benefits of the employer to which they are entitled.
L.3.- Social Security Each company must register its own name with the Venezuelan Social Security Institute (I.V.S.S. for it Spanish initials) as employer. The standard Social Security cost or tax is based on a minimum salary per employee of 75,000 Bolivars pe month, with the company paying 7% to 9% of the worker's salary, depending on the risk factor of the job, and the employee 4% per month. - Minimum Risk: employer 11%, employee 4%; - Middle Risk: employer 12%, employee 4%; - High Risk: employer 13%, employee 4%. Payment is to be made on a monthly basis according to bills by the institute.
L.4.- Lay-Off Regulations (Paro Fo)rz The amount to finance this insurance corresponds to 2.2% of the salary used for the calculation of the amount corresponding to Obligatory Social Security (up to a maximum of five salaries). From the amount quoted the employee contributes .50% and the employer 1.70%, to be paid to the Social Security Institute on a monthly basis.
L.5.- Housing Policy Law (Ley de Política Hab)itac The employer's contribution is 2% of the amount paid for monthly basic salary of each employee, in each case up to ten (10) minimum salaries. The employee's contribution is be 1% of the amount received for basic monthly salary up to ten (10) minimum salaries. The payment must be made to a Bank on a monthly basis, with a detail of the reasons for the payment.

6. Bankruptcy According to the Venezuelan Commercial Code, in the case where a company has lost more than a third (1/3) of its capital stock, the administrators must call a Shareholders Meeting to decide whether they will reimburse the capital or reduce it to the amount existing or liquidate the company. The shareholders may decide to continue the operations of the company and not take any decision at that time. However, when the loss has reached more than two thirds (2/3) of the capital stock, the company will necessarily enter into liquidation, if the shareholders do not reimburse the capital or limit it to the existing equity. Also, if the shareholders do not take any decision, the company must liquidate. In such a case, the administrators may not engage in new operations and if they do they will be personally liable. In case of bankruptcy, the administrators who have not called for a Shareholders Meeting when a company has incurred losses which exceed two thirds (2/3) of the capital stock, may be liable for criminal sanctions. Moratorium and bankruptcies are ruled by the Commercial Code. Moratorium is possible when the assets exceed the liabilities of the company. Normally moratorium is granted for one year to allow for a friendly liquidation, but nevertheless it is also possible to allow a company to recover and the Court may grant an extension for another year.

All proceedings are conducted under the Court's supervision. In the moratorium, a trustee and a creditor's committee will be designated to review all documentation, the credits and measures to be taken. As for bankruptcy, the Commercial Code distinguishes three kinds: fortuitous, guilty and fraudulent bankruptcy. Fortuitous bankruptcy occurs due to fortuitous events or force majeur that leads to a cessatio of payments and the impossibility to continue in business; a guilty bankruptcy occurs when there is negligent conduct; and fraudulent when there are acts that may be considered as willful misconduct. Bankruptcy may only occur when there is a cessation or suspension of payments and the Court must determine when this has occurred. This determination is important as the effects of the bankruptcy will be considered as of the date the cessation of payments occurred. The date of cessation of payments may not be more than two years before the Court's decision. Gratuitous acts during the term of two years and ten days prior to the declaration of bankruptcy are considered null and void. Onerous acts may also be considered null and void if the persons who contracted with the bankrupt had knowledge of the insolvency when entering into the agreements.

7. Sensitive Areas
Governmental controls and intervention was a major concern to business in Venezuela for half a century. Constitutional economical rights were partly suspended by a Presidential Decree of 1962, when the country experienced a political and economic crisis, until 1992 when these rights (economic guarantees) were fully restored, with the exception of a short period of time during the financial crisis of 1994. As mentioned above (See Section III, 2), since 1989, the government started new economic policies returning to the principles of a free market economy, outwardly oriented, reducing governmental intervention and public sector participation to economic activities in only basic productive sectors and the furnishing of public services for the basic social needs of the country.

In 1994, due to the financial crisis that affected a great number of banks and when international reserves descended dramatically, the administration of President Rafael Caldera returned to the economic policies of price and exchange controls. In April 1996, after preliminary agreement with the IMF had been reached, the Government announced a complete reversal o the policies applied during the crisis and returned to the market oriented economic policies. The main concern now is not whether these new policies will work, but rather if they can be maintained until their benefits start to be felt and the reforms become institutionalized and permanent. Industrial property remains a very sensitive area under the present law, particularly due to the extent of piracy. Rights are granted on a first-to-file basis. Even though a prior user in Venezuela may oppose or request the nullification of a granted trademark, there are statutes of limitation (2 years after registration) and the process is long, complicated and expensive.

Prior to considering doing business in Venezuela, the potential exporter or investor should apply for registration of his trademarks. In fact, he should do so even if Venezuela is only a potential market. In doing so, he should also consider registering his trade name. Notwithstanding the former, new legislation on industrial property is envisaged, aiming to strengthen the enforcement of the industrial property rights. Venezuela's entry to GATT made it possible to participate in the Uruguay Round of trade talks which commenced in 1986. Topics under discussion included agriculture, foreign investment, trade in services and intellectual property - all of which are critical to Venezuela.