Recently, the Supreme Court of Justice published two important decisions regarding the income tax treatment applicable to salaries. This topic has been controversial since 2007 and is current and relevant, especially when employees determine their income tax liability or when employers determine the applicable income tax withholding. The Political-Administrative Chamber issued the first decision and the Constitutional Chamber issued the second decision.
Previous to 2007, the different Income Tax Laws established that, except for certain circumstances, any remuneration that an employee received in exchange for the provision of personal services in Venezuela was subject to income tax liability (usually Articles 31 or 32 of the respective Income Tax Law.) In Venezuela, the payment of salaries has been usually subject to a back-up income tax withholding system, which the employers make upon paying the salary. The employees may credit the withheld amount against the final income tax liability determined in the year-end tax return.
The Constitutional Chamber of the Supreme Court of Justice, through decision No. 301 of February 27, 2007 ("Decision No. 301") and its subsequent clarifications, interpreted and amended Article 31 of the 1999 Income Tax Law, extending its effects to the 2006 and 2007 Income Tax Laws. In Decision No. 301, the Constitutional Chamber ruled that the definition of the net taxable income for employees is limited to the normal salary as defined within the labor legislation. As a result, the net taxable income did not include the marginal remunerations paid to employees on an irregular basis, the ones that do not qualify as salary or as normal salary.
Under the previous Organic Labor Law, in force at the time of Decision No. 301, which has identical provisions to the Organic Labor and Workers’ Law ("LOTTT"), currently in force, when the employer or the employee are obliged to pay a contribution, fee or tax, the taxable base should be the normal salary of the immediately previous month. The normal salary is the remuneration that an employee receives regularly and permanently for the provision of services. The definition of normal salary does not include irregular remunerations, severance payments, and payments that do not qualify as salary under the statute.
The amendment of the 2014 Income Tax Law modified Article 31 to include within the concept of net taxable income "(…) any remuneration, regular or irregular, that dependent workers derive from the provision of personal services, irrespective of its salary characterization (…)." The contradiction of Article 31 with Decision No. 301 is evident, because it included within the concept of net taxable income of employees the irregular remunerations (this is, the concepts that do not qualify as normal salary.) The amendment of the 2015 Income Tax Law did not modify Article 31, leaving that provision identical to the 2014 Income Tax Law.
2. First Decision: Silvino Molina Contreras v. Republic
The Political-Administrative Chamber, through decision No. 00585 of June 12, 2016 (Silvino Molina Contreras v. Republic) confirmed the holding of Decision No. 301 and declared that the net taxable income for determining an employee's income tax liability is the employee's normal salary, as defined by the labor legislation, which does not include irregular or non-permanent payments. In this decision, the Political-Administrative Chamber considered that profit-sharing, bonuses, extra hours, and vacations do not qualify as normal salary and, therefore, are not subject to income tax liability.
3. Second Decision: In re C.V.G. ALCASA C.A. and Sindicato Único de Trabajadores de Aluminio del Caroní en la Empresa C.V.G. Alcasa y Demás Empresas Productoras de Aluminio y Contratistas [SINTRALCASA]
Through decision No. 499 of June 30, 2016 [in re C.V.G. ALCASA C.A. y el Sindicato Único de Trabajadores de Aluminio del Caroní en la Empresa C.V.G. Alcasa y Demás Empresas Productoras de Aluminio y Contratistas (SINTRALCASA)] ("Decision No. 499"), the Constitutional Chamber, in response to a request for interpretation of Article 31 of the 2014 Income Tax Law, decided not to hear the request, among other procedural reasons, because the Constitutional Chamber considered it had previously analyzed Article 31 in Decision No. 301. The most important aspects of Decision No. 499 regarding the income tax liability for employees are the following:
- It confirmed that Decision No. 301 is binding. This means thatt all public authorities (including the Judiciary, Legislative, Executive, Moral, and the Public Citizen Powers) and individuals must abide Decision No. 301, and mandatorily comply with the decision's content;
- It established that Decision No. 301 had already determined the scope, content and implementation of the elements of the employees' net taxable income (i.e., normal salary); and,
- It declared that Decision No. 301 adjusted the text of Article 31 of the Income Tax Law to the content of Article 133 of the Labor Law, currently Articles 104 and 107 of the current LOTTT.
As a result of the above, it is reasonable to conclude that the criteria and wording of Article 31 of the Income Tax Law established in Decision No. 301 remain in force and that Article 31 of the 2014 and 2015 Income Tax Laws is unconstitutional because it contravenes Decision No. 301. Therefore, the concept of net taxable income for employees is restricted to normal salary, excluding all other concepts that (a) qualify as salary but do not fall within the definition of normal salary; and (b) do not qualify as salary. It is important to note that until the Constitutional Chamber declares Article 31 of the 2015 Income Tax Law as unconstitutional, said Article will maintain its validity within the Venezuelan legislation. As a result, the effects of Article 31 of the 2014 and 2015 Income Tax Laws may only cease to apply in specific cases through non-concentrated constitutional control by decisions of the National Integrated Service of Customs and Tax Administration (SENIAT) or the Venezuelan Courts.