On July 2 2019, the Venezuelan National Constituent ANC ("ANC") approved the Law ("Law") that created a high net worth tax (the "Tax").  We have assumed that the Law will apply in considering that a relevant portion of the decisions adopted by the ANC have been implemented and the Supreme Court of Justice has recognized the legal powers and authority of the ANC to enact decrees with force of law.  However, this issue is controversial as there are strong grounds to sustain the unconstitutionality and illegality of the acts dictated by the ANC.

The Law entered into force as of its publication in the Official Gazette on July 3, 2019 (Official Gazette No. 41.667 of July 3 2019.)  The Tax is a national (federal) tax and the National Integrated Service of Customs and Tax Administration (the "Service") will be in charge of its administration, assessment, collection and compliance.

In principle, the Tax applies on the net worth of the taxpayers and differs from the income tax because it applies on the net worth and not on the annual returns or increases thereof.  The classic definition of net worth is the difference of assets less liabilities.  The Law, however, contradicts itself because in reality the Tax will apply to the taxpayer's assets (the taxpayer cannot deduct its liabilities to determine the base of the tax, except encumbrances and liens).

The key aspects of the Tax are:

I - Taxpayers

The taxpayers will be:

a. The individuals designated as special taxpayers whose assets are equal to or greater than 36,000,000 Tax Units ("T.U.") [VES 1,800,000,000 or USD 251,924.42 using the current value of VES 50/T.U. and the exchange rate in forced on July 11, 2019 of VES 7,143/United States Dollar ("USD")]; and 
b. The legal entities designated as special taxpayers whose assets are equal to or greater than 100,000,000 T.U. (VES 5,000,000,000 or USD 699,790.06 using the same values.)

Absent an express definition, the special taxpayers are those designated by the Service (V. Superintendent of the Service, Administrative Guidelines No. 0685 that partially reformed Administrative Guidelines N-0828 of September 21, 2005 on Special Taxpayers, Official Gazette No. 38.622 of February 8, 2007.)  According to the Guidelines, the Service must designate the special taxpayers individually through an official letter.

Due to the foregoing, individuals or legal entities that the Service has not formally designated as special taxpayers (regardless of their assets) or do not have the minimum net worth indicated do not qualify as taxpayers.

II - Taxable Event

The tax liability will arise from the "ownership" and "possession" of the assets attributed to the taxpayers.  Absent an express definition, the Venezuelan Civil Code and special laws will define ownership and possession.  The Law attributes assets to their owner according to public records.  If the assets are not subject to public registration formalities, the Law attributes them to their holder.

The Law establishes special attribution rules for financial leasing, trusts and corporate assets of personal use of the company´s shareholders.  Once the taxpayer has reported an asset, the Law rebuttably presumes ownership or possession for the subsequent fiscal years.

III - Territoriality and Residence

The Tax applies to the taxpayers' global or territorial net worth in function of their condition of residents or not in Venezuela for the Tax.  The global net worth comprises the territorial and extraterritorial assets of the taxpayer.  The local net worth comprises by the assets in Venezuela, and include:

a. Real estate in Venezuela; 
b. Vessels, aircraft, ships, navigation accessories and motor vehicles registered in Venezuela and those of foreign registration that have remained in Venezuela for at least 120 continuous or discontinuous days during the fiscal year; 
c. The titles, shares, quotas or social participations and other securities representing the capital stock or equivalent, issued by Venezuelan companies; and 
d. Precious stones, minerals, works of art and jewelry (physically in Venezuela). 

Taxpayers residing in Venezuela will pay the Tax on their global net worth; while foreign or non-resident taxpayers will pay it only on their territorial net worth. Taxpayers who are Venezuelan nationals, but who do not reside in Venezuela, will also be taxed on their territorial net worth.  Non-resident taxpayers must include in their territorial net worth, the assets attributable to their permanent establishments in Venezuela.

The Law, similar to the Organic Tax Code ("Code"), considers that individuals are Venezuelan residents when: 

a. They remain in Venezuela for over 183 days in a calendar year (continuous or not) or in the year immediately prior to the fiscal year to which it corresponds to determine the Tax; 
b. Have in Venezuela the main nucleus or base of their economic activities or interests, directly or indirectly; 
c. Have Venezuelan nationality and are public officials or workers at the service of the State, even when the main nucleus or base of their economic activities or interests is abroad; or 
d. Have Venezuelan nationality and prove their new tax residence in a country or territory qualified as low tax jurisdiction, unless the country or territory has entered into a comprehensive tax information exchange agreement with Venezuela.

The Law rebuttably presumes that an individual qualified as a special taxpayer is a Venezuelan resident for the Tax when: (a) it maintains a habitual abode or has a main home in Venezuela; (b) is Venezuelan; or (c) his spouse or children (dependents) have a permanent home or main place of abode in Venezuela or are Venezuelans.  The evidence in rebuttal would be a certificate of tax residence in another country issued by a foreign tax authority.

Legal entities are Venezuelan residents when:

a. They have been incorporated under Venezuelan laws;
b. Have their tax or statutory domicile in Venezuela; or 
c. Have the place of effective management in Venezuela. 

IV - Taxable Base and Rate

The tax base is the "greater value" among: (a) the current market price of the asset, (b) the acquisition price of the asset updated according to the standards to be issued by the Service; and (c) the special rules for certain assets, such as real estate (values of the municipal land registry, market and updated acquisition price or value attributable to real estate property outside Venezuela according to foreign tax law), shares and participations (stocks exchange listings or value assigned according organized markets), jewelry, objects of art and antiquities, in rem rights, and other assets.  Determining market values and updated prices as references of the value of the assets and the "higher value" rule suggest a high discretion of the Service in determining the taxable base.  In addition, the Law establishes the Service may deploy "as many administrative control mechanisms as necessary to determine the accuracy of the information and the values reported by the taxpayers in their returns."

The Tax will apply only on the excess of the value of the assets over the minimum amounts specified for individuals and legal entities (i.e., 36,000,000 T.U. and 100,000,000 T.U., respectively).

The tax rate will be between 0.25% and 1.50% and the National Executive may establish progressive rates according to the value of the assets.  However, the Law set the rate initially at 0.25%.

The simplified formula of the Tax is:

Tax = Portion of the value of assets over 36,000,000 T.U. x 0,25%
Legal Entities
Tax = Portion of the value of assets over 100,000,000 T.U. x 0,25%

V - Exemptions and Exonerations 

The Law established these exemptions:

a. The Republic and other political territorial entities. 
b. The Venezuelan Central Bank. 
c. The functionally decentralized governmental entities.
d. The main house up to 64,000,000 T.U. (VES 3,200,000.000 or USD 447,865.64 using the prior values)
e. The household belongings, which include personal and household effects, household utensils and other personal property of the taxpayer's private use, except for jewelry, art objects and antiques.
f. Social benefits and other benefits derived from labor relations, including contributions and returns from savings funds and savings banks of workers.
g. Communal property rights.
h. The assets invested in primary agricultural, livestock, aquaculture, fish farming and fishing activities, as long as they constitute the taxpayer's main activities. 
i. The work of artists while they are property of the author. 

The National Executive, by decree, may grant tax exonerations to certain categories of assets, taxpayers and sectors of investment and production.

VI - Temporality 

The Tax will apply annually on the value of the net worth (assets) of the taxpayer at the close of each fiscal year.  The Tax would only apply to the fiscal years that begin after the Law entered into force on July 3, 2019 (V. Constitution, article 317; Code, article 8 and Constitutional Chamber of the Supreme Court of Justice, decision of June 30, 2004, in re José Andrés Romero Angrisano.)

The Law is not clear on the definition of the annual tax period.  According to the Code, analogy is admissible to fill legal gaps, with certain limitations; so, the Service might apply the rules of income tax analogously to determine the annual fiscal year (V. Code, article 8.)  According to such rules, the fiscal year is the 12-month period corresponding to the taxpayer, which coincides with the calendar year for individuals and is of free choice for legal entities (V. Regulations of the Income Tax Law, article 148.)  The Law considers that the fiscal year will close when: 

a. The individual dies; 
b. The legal entity is extinguished; changes its residence abroad; or is transformed so its tax treatment changes. 

VII - Filing, Payment and Control

The Service must issue the rules and instructions to update the value of the assets and implement the Tax, within 60 business days after July 3, 2019.  The Ministries with competence in finances and registries and notaries, can issue rules that prevent asset dispositions destined to evade or avoid the Tax.  The delegation of powers to the Service to establish elements related to the Tax and possible limitations through sub-legal rules would be contrary to the principle of tax legality and the constitutional right to private property.

Notwithstanding the foregoing, as the substantial aspects of payment and control of the Tax, the following stand out:

a. Informative Return of Assets: Individuals and legal entities whose "assets" (and not net worth) have a value equal to or greater than 150,000,000 T.U. (VES 7,500,000,000 or USD 1,049,685.09 using the prior values) must file an informative return in the terms and forms determined by the Service.
b. Obligation to inform: Judges, registrars, notaries, financial institutions, insurance and reinsurance companies, brokerage firms, money exchange offices, depositories, museums, galleries, jewelers and other public or private entities before which they register, register or deposit movable and immovable property, must send to the Service, the information required.
c. Withholding Agents: The Service may designate as withholding agents of the Tax, those who intervene in acts or operations in which they can carry out, by themselves or through an interposed person, the withholding or collection of the Tax.



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