Supreme Tribunal Upholds Investment Promotion and Protection Law

A recent ruling of the Supreme Tribunal represents a firm endorsement of the Law for the Promotion and Protection of Investments. The objective of this law is to provide investors with a reliable tax and incentive framework within which to advance their projects in Venezuela, irrespective of their nationality.

With the adoption of a new Constitution in 1999 there were doubts surrounding the validity of the law which was enacted before the Constitution was adopted. The law gives both national and offshore investments a guarantee that the tax terms and incentives granted at the time of investment will not change, notwithstanding any legal changes to the Venezuelan taxation system. The guarantee is at the ad hoc approval of Venezuelan Congress.

The law also enables interested investors to negotiate special tax incentives and benefits with the national authorities, which are then incorporated into a so-called 'legal stability contract'. Once approved by the national assembly, this contract protects the investor from any future revocation of the tax benefits and incentives.

Opposition to the law reached the Supreme Tribunal. Annulment of the law was sought on the ground of unconstitutionality. It was claimed, among other things, that the legal stability contract:

• tends to discriminate in favour of foreign investors;

• unduly constrains the sovereign powers of Congress to amend or cancel existing legislation; and

• allows disputes concerning the application of these contracts to be resolved through arbitration, when disputes relating to contracts of national interest are generally decided exclusively through Venezuela's national courts.

In its judgment of February 14 2001 the Supreme Tribunal categorically endorsed the constitutionality of the law.

The judgment stated that the law is not discriminatory, on the ground that its benefits are available to national and international investors on an equal footing. In addition, the contract was found not to violate the constitutional powers of the assembly to legislate and amend legislation, since it is subject to congressional approval and sanctions by the tax authorities. Finally, the Constitution provides for the use of arbitration as a form of alternative dispute resolution, as part of the Venezuelan legal system. Therefore the Constitution does not prevent disputes arising from these agreements from being submitted to private arbitration.

For further information on this topic please contact Humberto Vivas at Hoet Peláez Castillo & Duque by telephone (+58 212 263 6644) or by fax (+58 212 263 7744) or by e-mail ([email protected]).