In what appears to be the last chapter of a saga about the Venezuelan income tax taxable base for employees that started in 2007, on 28 October 2016 the Constitutional Chamber of the Supreme Court of Justice (Constitutional Chamber) issued decision No. 909 (Decision 909), which settled the request for clarification of the Constitutional Chamber's Decision No. 673 of 2 August 2016, case: Unconstitutionality action filed by Reinaldo Guilarte against Article 31 of the 2014 Income Tax Law (Decision 673). Decision 909 is relevant for employers and employees because it tacitly confirmed Decision 673, and ratified that (i) the income tax taxable base for employees is limited to their normal salary, and (ii) Decision 673 is effective as of 1 January 2008. Employers will have to determine which items qualify as normal salary for calculating the Venezuelan back-up income tax withholding.

On 27 February 2007 the Constitutional Chamber issued Decision No. 301, which decided the case: Unconstitutionality action filed by Adriana Vigilanza García and Carlos A. Vecchio against Articles 67, 68, 69, 72, 74 and 79 of the 1999 Income Tax Law (Decision 301)[1]. The Constitutional Chamber decided not to hear the action. However, implementing its capacity of constitutional interpretation and its function of guarantor of the Constitution (although the claimants did not argue the unconstitutionality of income tax regime applicable to salaries), the Constitutional Chamber analyzed the constitutionality of the Article 31 of the 1999 Income Tax Law and extended its interpretative effects to the same Article of the 2006 Income Tax Law (which were identical).

The Constitutional Chamber, through Decision 301, and for purposes of adjusting Article 31 to the tax principles established in the Constitution and the Organic Labor Law, applicable at that time, modified the content of such Article, and established that (i) the salaries derived on a regular and permanent basis in consideration for the provision of personal services under a labor relationship (normal salary) are considered net taxable income; and (ii) income derived on an irregular basis, social benefits, and income that the Law does not consider to be within the concept of normal salary are excluded from the taxable base. One of the clarifications of Decision 301 determined that such decision would be applicable in the future, as of the first fiscal year that started from the publication of the decision in the Official Gazette.

The 2014 reform to the Income Tax Law[2] modified Article 31, including, within the concept of net taxable income, ''(…) all compensation or profit, regular or irregular, derived from the provision of services performed under dependent relationship regardless of its salary nature (…)''. The contradiction of the mentioned Article with Decision 301 is evident, because it included within the concept of the employee's net taxable income the irregular compensations (i.e. this is, items that do not qualify as normal salary). The 2015 Income Tax Law reform[3] did not modify such Article, leaving its wording identical to the 2014 Income Tax Law.

On 2 August 2016, the Constitutional Chamber issued the Decision 673, in which it established that:

  1. The court cannot hear the action because it considered that the issue of the employee's income tax taxable base was a matter decided (res judicata) under Decision 301.
  2. Article 31 of the 2014 and 2015 Income Tax Laws, reissued Article 31 of the 2007 Income Tax Law, which the Constitutional Chamber had already declared unconstitutional through Decision 301; and,
  3. Ratified the content and scope of Decision 301 and its clarifications, including within the interpretation and application of the holding of Decision 301 to Article 31 of the 2014 and 2015 Income Tax Laws.

The claimant, Reinaldo Guilarte, requested a clarification of Decision 673. He asked, specifically, about the date in which Decision 673 would be applicable. Decision 909 established that the clarification was inadmissible because Decision 673 ratifies Decision 301 and its clarifications.

As a result, Article 31 of the 2014 Income Tax Law is null and void since its enactment that year and, as a consequence, it could not have had any legal effect. Additionally, the employers are not obliged to withhold income tax on the payment of items that do not qualify as normal salary and the employees must only include normal salary within the income tax taxable base for their future income tax returns.

Those employees that in previous fiscal years, not yet barred by the statute of limitations, paid their income tax on items not qualifying as normal salary may file amended income tax returns and report tax credits derived from the overpayment of income tax. The employees will be able to, alternatively, (i) request to the Revenue Service (SENIAT) the recovery of the tax credits plus late payment interests; (ii) offset the tax credits against other federal taxes other than VAT, such as the income tax for fiscal year 2016; or (iii) assign the credits, generally at discount, to other taxpayers, for the same purposes of offsetting. It is likely that filing amended returns will trigger tax audits.