Resident companies are liable for corporate income tax (impuesto sobre la renta) on profits arising in Venezuela. The territoriality principle embodied in income tax law ensures that, in general, only income arising or deemed to arise in Venezuela is taxed. The concept of residence is thus of only limited importance, but insofar as it is relevant, a company is considered resident in Venezuela if it is incorporated under Venezuelan commercial law. Income is deemed to arise in the country if the relevant transaction takes place there, the services in question are performed there, or the property giving rise to it is located there, whether or not the recipient of the income maintains an establishment in Venezuela.

CORPORATE INCOME TAX RATES

Taxable income is charged based on the tax unit (unidad tributaria). The value of one tax unit is fixed each year. Currently, one tax unit equals Bs 1,700. A proposal has been made to have one tax unit equal Bs 2,700. Current tax rates are shown in Table A.

TABLE A Corporate Income Tax Rates
Band of Taxable Income (Bs)   Rate of Tax on     Cumulative Tax on
                              Band (%)           Upper Limit of Band 
                                                 (Bs)

0-3,400,000                   15                 510,000
3,400,001-5,100,000           22                 884,000
Over 5,100,000                34                 -

TAXABLE INCOME

The taxable income of a resident company is normally determined based on its financial statements. These should be prepared in conformity with Venezuela's generally accepted accounting principles. The results shown in the financial statements are then adjusted to take account of nondeductible expenses, nontaxable income, special tax allowances, and so forth.

In the case of several activities, a fixed percentage of gross income is deemed to be taxable income. Those activities include international transportation, activities of international news agencies, foreign film production or distribution, specified professional activities, sales of imports on consignment, technical assistance, and technological services.

Inventory Valuations

Inventory is, in principle, valued at the lower of cost and market value. Any generally acceptable cost basis may be used, including the first-in, first-out and average cost methods. The method adopted must be applied consistently. Long-term work-in-progress contracts are normally valued according to the percentage-of-completion method.

Dividend Income

Dividends are not subject to tax.

Foreign-Source Income

Foreign-source income is not taxable, but fees paid for technical assistance or technological services rendered abroad but used in Venezuela can be deemed to be realized there and charged to tax (see "TAXATION OF NON RESIDENT ENTITIES"). The rules are more likely to apply to nonresidents, but, technically, they could apply to residents as well.

No relief is given for foreign taxes suffered either by way of a credit against Venezuelan tax or an allowable deduction.

Capital Gains

Until recently, all capital gains were treated as taxable, and capital losses were deductible. For 1995 and beyond, however, the trading of equity securities in the stock exchange is taxed at a flat-income tax rate of 1% of the selling price of each security. Under this rule, capital losses are not used in computing income taxes.

Asset Revaluation

When a resident company adjusts its assets for inflation (see "ACCOUNTING FOR INFLATION"), the amount of any increase in the value of a fixed asset is depreciable over the asset's remaining useful life. The depreciation attributable to the inflation adjustment is allowed as an addition to normal historical depreciation.

In calculating capital gains on re-valued fixed assets, the initial adjustment for inflation can be taken into account only in the case of companies that are dissolved or liquidated.

Exchange Differences

Exchange gains are taxed only when realized, and exchange losses are relieved only when incurred. Provisions in financial statements for unrealized exchange losses are therefore disallowed. Items denominated in foreign currencies are regarded as non-monetary and, therefore, are subject to the rules regarding inflation adjustments (see "ACCOUNTING FOR INFLATION"). The exchange rate is, however, used instead of the consumer price index.

DEDUCTIONS

In general, all normal and necessary expenses incurred within Venezuela to obtain taxable income are deductible if they are recorded in the statutory books and supported by evidence. The tax authorities will only accept Venezuelan suppliers' invoices as valid evidence of deductibility if such invoices bear the tax registration number of the payee.

The general rule is subject to a number of exceptions. Deductions may be claimed for costs clearly related to sales within Venezuela, as in the case of imported merchandise and the associated freight costs; for selling expenses connected with exports from Venezuela; for at least a proportion of foreign travel costs; for technical assistance supplied abroad but used in Venezuela; and for technological services. The requirement that expenses must be incurred within the country is otherwise interpreted very strictly.

Depreciation

Depreciation must be based on the cost of assets, although the cost may be stepped up to take account of inflation. The original cost and not the adjusted cost must, however, be used when assets are sold in computing gains. Assets must be located in Venezuela or, in the case of ships and aircraft, based in Venezuela. Deductions commence in the year in which the asset is first put into operation. The deduction for the first period is in proportion to the length of that period.

Any generally accepted accounting method may be used in calculating depreciation, but straight-line and units-of-production methods are the ones most commonly used. There are no mandatory depreciation rates or useful lives for tax purposes. Once a depreciation method has been adopted, it cannot be changed without the prior approval of the tax authorities.

Interest

Interest is freely deductible as long as the taxpayer can show that it has been charged at an arm's-length rate. Deductions are based on amounts payable, but if interest accrued is not paid in the next tax year, the deduction is reversed and the amount is treated as taxable income.

Directors' and Management Remuneration

Deductions for the remuneration, including profit-sharing bonuses, of members of the board of directors, administrators, and general managers are normally limited to 15% of the companies' gross profit on sales for the year (that is, the profit before selling, distribution, and administrative expenses and tax are deducted).

Taxes

Income tax and general tax on corporate assets are not deductible. Other taxes are deductible for the year in which they are paid.

Bad and Doubtful Debts

Deductions for bad and doubtful debts are allowed if the following conditions are met:

  • The debts are normal trade or business debts. Thus, deductions for financial debts are not allowable in the case of ordinary trading companies, unless they are owed by the companies' employees.
  • The income relative to the debt has been recognized in the financial statements.
  • The tax authorities are satisfied that the debtor is insolvent or that the cost of collecting the debt would not be justified.

General provisions are not deductible, either as percentages of total debtors or following a review of individual debts. Provisions for collection costs are not deductible.

Formation and Start-Up Costs

Organizational and pre-trading expenses are usually capitalized and written off over three years for both accounting and tax purposes.

Royalties

Royalties are deductible on a cash basis, and withholding tax must be deducted at the time of payment.

Charitable Contributions

Deductions for allowable charitable contributions are generally limited to 10% of net income (before the contributions) when the net income does not exceed 10,000 tax units and 8% when it exceeds this amount.

TREATMENT OF LOSSES

Net operating losses, adjusted for tax purposes, may be carried forward for three years. No carryback of losses is permitted.

In the case of mergers, the surviving entity keeps all the tax attributes of the absorbed company. Such tax attributes include tax net operating losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Deirdre Silberstein, Washington, on +1 202 955 4000 or enter a text search "Deloitte & Touche" and "Business Monitor".