On December 29, 2017, the National Constituent Assembly (ANC) issued the Constitutional Law of Productive Foreign Investment [1] (the Law) in exercise of the powers that correspond to the National Assembly as the Legislative Power [2]. The Law repealed the Decree No. 1,438 with Rank, Value and Force of Law of Foreign Investments, published in the Special Official Gazette No. 6,152 of November 18, 2014 (the Repealed Law) and modified the legal regime applicable to foreign investments in Venezuela. The National Executive must issue the Regulations to the Law within 90 days after enactment.

The Law maintains (i) the matters of foreign investments as public interest; (ii) the provision regarding the equality in treatment between national and foreign investments (regardless of the sector or economic activity) and subject to the special regulations applicable to strategic or preferential sectors; and (iii) the obligation to register contracts of technology.

Main Features of the Law

Governing body. The Law only states that the ministry with powers in foreign investment matters will be the governing body; however, it does not specify whether the National Center of Foreign Trade (CENCOEX) will remain in control. Although the Repealed Law eliminated the Superintendence of Foreign Investments (SIEX) and transferred its powers to CENCOEX, in practice and up to this date SIEX remains in control of foreign investment matters.

Definition of foreign investment. The Law defines three types of foreign investment:

  • Direct foreign investment: through the contribution of tangible or financial resources destined to become part of the equity of the recipients of the foreign investment. The Law requires that the contributions made must represent a participation equal or higher than 10% of the capital stock;
  • Portfolio foreign investment: acquisition of stock or interest in any type of entity that represent a participation equal or higher than 10% of the capital stock;
  • Preferential foreign investment: performed in sectors defined as preferential by the National Executive. This foreign investment will obtain benefits and incentives depending on the policies of the National Executive.

Minimum amount of the foreign investment. The minimum amount to register a foreign investment was changed from the equivalent of USD 1,000,000.00 (calculated at the official exchange rate) to the equivalent of (i) € 800,000.00 or (ii) 6,500,000.00 Renminbi or yuan (Chinese currency. 1 Chinese yuan = USD 0.15611) or (iii) their equivalent in any other foreign currency.

Constitutive value of the foreign investment. The Law increased the constitutive value of the foreign investment up to 100% represented by tangible assets in Venezuela (e.g., equipment). The Repealed Law required 75%.

Minimum term of the foreign investment. The minimum term required for foreign investments to remain in the country was reduced from five to two years. After this term, investors can send remittances abroad for the capital stock originally invested, registered and updated.

Internal financing. Investors can have an internal financing of their investment of up to 15% of the total value of thereof.

Repatriation of dividends. Foreign investors may distribute dividends, and at the end of the first fiscal year, up to 100% of the profits or dividends derived from their registered and updated foreign investment. Only in cases of force majeure or extraordinary economic situations, the National Executive may reduce this percentage to between 60% to 80% of the profits.

The Law includes a general provision whereby the National Executive can limit remittances in cases of extraordinary circumstances that affect the economic and financial safety of the nation. The scope of this general limitation is not clear regarding the specific limits indicated in the previous paragraph.

Reinvestment of dividends and profits. The Law maintains the rights of foreign investors to totally or partially reinvest the profits obtained in local currency (to be recognized as foreign investment).

Remittances abroad. The Law maintains the rights of foreign investors to send remittances abroad derived from the monetary income obtained from the sale, within the country, of their stock or investment and the amounts deriving from capital reduction, after the two-year term has elapsed. If the local entity is liquidated, the foreign investors may the full amount of the liquidated investment.

Responsable business behavior. The Law forbids foreign entities to engage in any conduct that hinders, stops or complicates their own (or related companies) productive process due to political reasons nor shall the participate in productive strikes or boycotts that contribute or pretend to contribute the disruption of the democracy and its institutions. In this sense, foreign companies and their representatives cannot contribute through donations, contributions, revenues or facilities to any public or private institutions, non-governmental organizations, civil associations or individuals without the consent of the governing body. Additionally, investors cannot participate either directly or indirectly in the national political debate or contribute to the formation of an opinion regarding topics of public interest in social media.

Payment of taxes in foreign currency. Companies which 70% or more of their income comes from the liquidation of traditional exports and mining activities may be subject to pay the corresponding taxes in foreign currency. The Law does not define "traditional exports".

Investment Agreement. The Law obliges to subscribe an Investment Agreement which parties are the investor or foreign company with (i) the State, (ii) grand national companies, (iii) national private or public companies, (iv) joint ventures, (v) non-resident individuals and (vi) foreign residents in Venezuela. This Investment Agreement is not mandatory for investments that are lower than the minimum amount, and for investments related to purchase of real property, reinvestment of the profits or capital increase. It is not clear whether the Investment Agreement will be required for registered investments or whether it will only be required when public entities are involved in the investment.

New benefits. The Law provides a program of special benefits and favorable conditions granted to foreign investments that have agreed on a foreign investment agreement. Some benefits include tax exemptions, accelerated amortizations, tariff exemptions and preferential access to raw materials administrated by the State. It is not clear whether the "foreign investment agreement" is the same as the Investment Agreement explained under the previous item. And the "foreign investment agreement" could imply state control over the activity of the investors and issuing guidelines to their investments to satisfy the needs required by the National Government.

Fines. Failure to comply with the Law may expose the investors to fines of up to 2% of the total investment. The concurrence of two or more infractions increases the fine in one percentage point. In case of reoccurrence, the fine will be increased by 3 percentage points over the initial fine. The fine shall be paid in the same currency of the investment.

Considering the above, the Law will create important distortions in the Venezuelan legal system because it expands state control over foreign investments in Venezuela, besides (i) it contains imprecisions and inaccuracies related to new foreign investments and the legal regime applicable to foreign investments made prior to its enactment, and (ii) it is not clear what will happen to investments lower than 10% of the capital stock which have not been authorized by the governing body nor what would be the legal status of such an investment, since the rights of foreign investors will only become effective from registration.